Carney Acts on U.K. Housing Boom Danger With Loan Restraints

Bank of England Governor Mark Carney took action to restrain the U.K.’s house-price boom by ending incentives for mortgage lending in a package aimed at curbing “evolving risks” to financial stability.

“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 today. “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 program.

“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.”

Prices Climb

The revamp, announced in the BOE’s Financial Stability Report, comes after official data showed domestic demand drove an acceleration in U.K. 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 fueled by a government incentive program 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-fueled binge that led to the credit crisis.

The BOE said its changes today 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 U.K. economy for as long as it deems appropriate.”

Market Analysis

The pound strengthened 0.3 percent to $1.6336 at 12:47 p.m. London time, while the FTSE 350 Household Goods & Home Construction Index fell 1.1 percent.

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.”

Cheaper Funding

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 today 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 program 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. “This is a significant barrier to first-time buyers.”

The BOE said in its report that if the new measures announced today don’t prevent a build-up of housing risks, its Financial Policy Committee has an “extensive toolkit.”

Among the actions it could take would be to increase capital requirements for mortgage lending, both for new and existing loans. It could also make recommendations on underwriting standards, the government’s Help to Buy program or seek an increase in the entire level of capital a bank holds.

2014 Tests

The BOE also said today it is continuing its analysis of the potential impact of an increase in interest rates on borrowers, banks and the wider economy. This review will feed into stress tests that regulators plan to conduct in 2014.

“Stability risks remains, including from the high indebtedness of some sovereigns, corporates and households,” the BOE said. “A sharp rise in interest rates, especially if not associated with a strengthening in incomes, could test financial system resilience.”

The BOE’s key interest rate is currently at a record-low 0.5 percent and the Monetary Policy Committee has said it won’t increase it at least until unemployment falls to 7 percent.

The FPC recommended today that the Financial Conduct Authority, the U.K.’s markets watchdog, require banks to stress test borrowers’ ability to cover mortgage payments if interest rates rise.

“The package of measures that I have described is a coherent, proportionate response to the evolving risks in the housing market,” Carney said. “Those risks are manageable and they are being managed.”

(Updates with quote in fourth paragraph.)
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