New measures revealed by the Bank of England to address short-term housing market risks
The released its latest Financial Stability report today, which reveals new policy measures to tackle short term risks that may arise from a bubble in the housing market. New recommendations include asking banks to test whether a 3% rise in base rates over the first five years of a mortgage would affect applicants’ ability to pay back their loans. In addition, the bank is seeking to limit the number of mortgage loans which are offered at income multiples of 4.5 or more.
However, many banks are already stress-testing what impact a 2-3% rise in the base rate would have on prospective borrowers. In addition, only 11% of new mortgages, by volume, are currently above the 4.5 income multiple. This suggests that these measures will not have a dramatic effect, but should help to curb excesses where the banks themselves are not already doing so.
Retaining stability in the financial system is one of the chief goals of the bank. Under the original framework of forward guidance set out by the governor of the Bank of England, Mark Carney, threats to financial stability was one of the knockout clauses which could trigger a rise in interest rates. However, interest rates can be somewhat of a blunt tool in addressing issues in the housing market: so many other financial instruments, and economic developments in general, are dependent on this rate. The bank’s announcements today seek to address runaway house prices over the short-term, without having to raise interest rates – which can have significant effects on households struggling to pay existing debts.
The bank has to strike a balance between managing short-term risks in the mortgage market, with supporting confidence and economic activity which results from a healthy housing market. The latest data for May show annualised house price growth of 8.2% and 9.5% on the Halifax and Nationwide measures, respectively. However, any policies to cool prices have to consider that we are operating in a two-speed housing market: London house prices are soaring this year – Cebr forecasts them to be 13.8% higher in 2014 compared to 2013 – whilst the UK as a whole is expected to see growth of around 6.4%, on the ONS measure.
It is important the bank does not quash a housing recovery in the rest of the country through becoming too fixated with rising prices in London. Cebr’s view is that the Government’s Help to Buy scheme has helped keep prices buoyant over the short term, and is beginning to contribute to stimulating house-building, slowly but surely. This is the real key to restraining house price increases over the long term: as the governor said, the bank does not have the powers to build a single house.
