Bank tries to swerve housing bubble
Governor Mark Carney warns house
prices are gaining momentum – but says housing market poses no immediate
risk
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Q&A: shift in Bank of England policyGovernor Mark Carney says Funding for Lending Scheme will concentrate on business loans as house prices gain momentum
- theguardian.com,
A scheme to bolster mortgage lending that was only introduced last year is being scaled back as the Bank of England takes the first steps to prevent a housing bubble by increasing its surveillance of the housing market in a move that sparked fears mortgage rates could rise.
The surprise move, which Bank of England governor Mark Carney said was taken jointly with chancellor George Osborne, means that the funding for lending (FLS) scheme – which makes it cheaper for banks to fund lending – will now focus on business loans until the end of January 2015. The FLS for home loans end a year earlier than planned, in January 2014.
While stressing that the housing market is not an immediate risk to financial stability, Carney unveiled a series of measures to calm the mortgage market including imposing tougher tests on customers before they are granted home loans.
Among the other attempts to keep a check on the housing market, the Bank said the annual health check of Britain's banking sector being introduced next year will also require banks to look at their resilience to housing shocks.
Explaining the decision to remove mortgages from the FLS scheme next year, Carney, said it was "no longer appropriate to have our foot on the accelerator, better to shift it to neutral".
The TUC said the move would "hit the feelgood factor" that Osborne has been trying to create ahead of the 2015 general election and sparked speculation that the move to end a key part of the FLS had been taken reluctantly by the chancellor.
Osborne said: "Now that the housing market is starting to pick up, it is right that we focus the scheme's firepower on small businesses. Small firms are the lifeblood of our economy."
More than £1bn was wiped off the value of housebuilders – Barratt Developments fell almost 10% and Persimmon 6% – although some economics were sceptical that the withdrawal of the FLS would have a major impact. A Treasury panel of forecasters expects house price rises of up to 10% in 2014. They rose 6.8% in the 12 months to October.
Cathy Jamieson, shadow financial secretary to the Treasury, said: "We called for the scheme to prioritise lending to business and, after three wasted years when net lending to firms has fallen, the government is belatedly acting. But homeowners facing a cost-of-living crisis will want reassurance from ministers that suddenly taking the scheme away from mortgage lending won't see a rise in mortgage rates".
In a letter to Osborne, Carney set out the changes to the FLS which has led to a fall in bank funding costs since it was introduced in July 2012.
Carney said that the FLS would try to focus more on lending to the business sector, and a relaxation in capital rules that had been applied to mortgage lending would be removed.
"Although the growth in household loan volumes remains modest, activity is picking up and house price momentum appears to be gaining momentum," Carney told the chancellor.
However, there are no changes to the Help to Buy scheme which the Bank will assess annually from 2014. However, in its half-yearly check on the risks to financial stability the Bank said there was not a risk to the financial system from the housing market.
COPY http://www.theguardian.com/uk
"UK housing market activity is picking up from low level and inflation in house prices – which is already above historical averages on some metrics – appears to be gaining momentum. At present activity remains below long-term trends and underwriting standards are materially higher than before crisis. There is little evidence of an immediate threat to stability," the Bank said in its half-yearly Financial Stability Report (FSR).
But the FSR said risks could come from further rises in house prices and a buildup in household indebtedness which would be accentuated if underwriting standards on mortgage lending were to be relaxed so it was putting "several actions in train that will guard against a build-up in vulnerabilities".
As well as removing the lower capital rules for banks lending for mortgages via the FLS, the Financial Conduct Authority will ask banks to test customers' vulnerability, not just to the scenario of a 3% base rate in five years' time, but also a lengthening in mortgage terms, for instance. These affordability tests will be introduced from April 2014.
"The FCA should require mortgage lenders to have regard to any future FPC recommendation on appropriate interest rate stress tests to use in the assessment of affordability," the FPC said.
Frances O'Grady, general secretary of the TUC, said: "This is good news for the real economy, but bad news for the chancellor. The Bank of England is clearly worried that the economic recovery is based on consumers borrowing on the back of rising house prices rather than business investment and rising exports."
"Ensuring that funding for lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feelgood factor that the chancellor is hoping will distract from the failure of government policy to rebalance the economy," she added.
The Bank said a key risk to financial stability could be caused by an abrupt rise in long-term interest rates and the FCA is working with banks and other firms to ensure they are prepared for this risk. Public sector indebtedness has also risen since the crisis and some households remain vulnerable. "Financial stability risks remain including from the high indebtedness of some sovereigns, corporates and households. These vulnerabilities have been kept in check by low interest rates and other policy interventions," the FSR said.
Households with loans five times greater than their incomes account for a fifth of total UK mortgage debt.
The FSR spelt out other actions it could take in the future to mitigate risks from the housing market such as making further changes to capital rules.
It also set out more detail about how it might set the so-called leverage ratio, which determines how much capital banks hold against their loans.
The surprise move, which Bank of England governor Mark Carney said was taken jointly with chancellor George Osborne, means that the funding for lending (FLS) scheme – which makes it cheaper for banks to fund lending – will now focus on business loans until the end of January 2015. The FLS for home loans end a year earlier than planned, in January 2014.
While stressing that the housing market is not an immediate risk to financial stability, Carney unveiled a series of measures to calm the mortgage market including imposing tougher tests on customers before they are granted home loans.
Among the other attempts to keep a check on the housing market, the Bank said the annual health check of Britain's banking sector being introduced next year will also require banks to look at their resilience to housing shocks.
Explaining the decision to remove mortgages from the FLS scheme next year, Carney, said it was "no longer appropriate to have our foot on the accelerator, better to shift it to neutral".
The TUC said the move would "hit the feelgood factor" that Osborne has been trying to create ahead of the 2015 general election and sparked speculation that the move to end a key part of the FLS had been taken reluctantly by the chancellor.
Osborne said: "Now that the housing market is starting to pick up, it is right that we focus the scheme's firepower on small businesses. Small firms are the lifeblood of our economy."
More than £1bn was wiped off the value of housebuilders – Barratt Developments fell almost 10% and Persimmon 6% – although some economics were sceptical that the withdrawal of the FLS would have a major impact. A Treasury panel of forecasters expects house price rises of up to 10% in 2014. They rose 6.8% in the 12 months to October.
Cathy Jamieson, shadow financial secretary to the Treasury, said: "We called for the scheme to prioritise lending to business and, after three wasted years when net lending to firms has fallen, the government is belatedly acting. But homeowners facing a cost-of-living crisis will want reassurance from ministers that suddenly taking the scheme away from mortgage lending won't see a rise in mortgage rates".
In a letter to Osborne, Carney set out the changes to the FLS which has led to a fall in bank funding costs since it was introduced in July 2012.
Carney said that the FLS would try to focus more on lending to the business sector, and a relaxation in capital rules that had been applied to mortgage lending would be removed.
"Although the growth in household loan volumes remains modest, activity is picking up and house price momentum appears to be gaining momentum," Carney told the chancellor.
However, there are no changes to the Help to Buy scheme which the Bank will assess annually from 2014. However, in its half-yearly check on the risks to financial stability the Bank said there was not a risk to the financial system from the housing market.
COPY http://www.theguardian.com/uk
"UK housing market activity is picking up from low level and inflation in house prices – which is already above historical averages on some metrics – appears to be gaining momentum. At present activity remains below long-term trends and underwriting standards are materially higher than before crisis. There is little evidence of an immediate threat to stability," the Bank said in its half-yearly Financial Stability Report (FSR).
But the FSR said risks could come from further rises in house prices and a buildup in household indebtedness which would be accentuated if underwriting standards on mortgage lending were to be relaxed so it was putting "several actions in train that will guard against a build-up in vulnerabilities".
As well as removing the lower capital rules for banks lending for mortgages via the FLS, the Financial Conduct Authority will ask banks to test customers' vulnerability, not just to the scenario of a 3% base rate in five years' time, but also a lengthening in mortgage terms, for instance. These affordability tests will be introduced from April 2014.
"The FCA should require mortgage lenders to have regard to any future FPC recommendation on appropriate interest rate stress tests to use in the assessment of affordability," the FPC said.
Frances O'Grady, general secretary of the TUC, said: "This is good news for the real economy, but bad news for the chancellor. The Bank of England is clearly worried that the economic recovery is based on consumers borrowing on the back of rising house prices rather than business investment and rising exports."
"Ensuring that funding for lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feelgood factor that the chancellor is hoping will distract from the failure of government policy to rebalance the economy," she added.
The Bank said a key risk to financial stability could be caused by an abrupt rise in long-term interest rates and the FCA is working with banks and other firms to ensure they are prepared for this risk. Public sector indebtedness has also risen since the crisis and some households remain vulnerable. "Financial stability risks remain including from the high indebtedness of some sovereigns, corporates and households. These vulnerabilities have been kept in check by low interest rates and other policy interventions," the FSR said.
Households with loans five times greater than their incomes account for a fifth of total UK mortgage debt.
The FSR spelt out other actions it could take in the future to mitigate risks from the housing market such as making further changes to capital rules.
It also set out more detail about how it might set the so-called leverage ratio, which determines how much capital banks hold against their loans.
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