Carney acts on UK housing boom danger with mortgage lending curbs

Bloomberg/London/Brussels

“This will help keep the housing market on a sustainable path and ensure the broader economy continues to receive the stimulus it needs, for as long as it needs, to sustain the recovery,” Carney told reporters in London yesterday. “By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later.”

The pound rose and construction stocks fell as Carney unveiled changes to the central bank’s Funding for Lending Scheme that will mean it only applies to business loans from 2014 and will no longer be available for household borrowing. Regulators will also end a measure that allowed banks to not hold capital against mortgages granted under the programme.

“These are the first baby steps on the booming housing market,” said Rob Wood, an economist at Berenberg Bank in London and a former BoE official. “Mark Carney has shown a willingness to act quickly on an issue. It’s likely to be the first of several steps on the housing market over the next year or two.”

The revamp, announced in the BoE’s Financial Stability Report, comes after official data showed domestic demand drove an acceleration in UK growth in the third quarter. House prices rose to a record last month, according to property researcher Acadametrics Ltd and Nationwide Building Society saw values climbing from a year earlier at the fastest pace since 2010. The increase in housing demand has been partly fuelled by a government incentive programme known as Help to Buy, which aids buyers with small deposits. Former BoE policy maker Adam Posen said this week that the plan may spur a bubble, while former Financial Services Authority chairman Adair Turner has said Britain risks repeating the debt-fuelled binge that led to the credit crisis.

The BoE said its changes yesterday don’t have implications for the operation of Help to Buy and won’t have a material impact on the Monetary Policy Committee’s outlook.

“The package of measures I have described today will contribute to a constructive evolution of the housing market,” Carney said. “By reinforcing financial stability, they further reinforce the MPC’s ability to provide exceptional monetary stimulus to the entire UK economy for as long as it deems appropriate.”

In its analysis of the property market, the BoE said that house-price inflation has gathered momentum and activity has picked up, albeit from a low level. While it said there is “little evidence of an immediate threat to stability,” it warned that risks may build if there is a rapid increase in house prices and consumer indebtedness.

“The question is, where does it go from here?” Carney said. “In a recovery with rising incomes, what we don’t want to have is a housing market driven by deterioration in bank balance sheets and underwriting standards.”

The FLS was introduced in June 2012 to boost lending by giving banks the ability to access cheaper funding. The level of funds they could draw depended on how much they were lending to the economy.

Chancellor of the Exchequer George Osborne said in a statement yesterday that it was a “successful tool in supporting the recovery,” though it’s right to focus its “firepower” on businesses. Part of the changes today include a reduction in the fee to access the scheme.

Osborne also said the FLS is a broad credit-enhancing programme and there is still a need for more targeted measures such as Help to Buy. The market for higher loan-to-value mortgages “remains very restricted by historical standards,” he said.