U.K. Homebuilders Drop as Central Bank Ends Loan IncentivesNeil Callanan and Patrick Gower
U.K. homebuilders led by Persimmon Plc and Taylor Wimpey Plc fell after the Bank of England said it will end incentives for mortgage lending under its credit-boosting program.
The Bloomberg EMEA Home Builders Index of 10 stocks closed down 4.4 percent, the most since Aug. 15. Persimmon, the largest U.K. homebuilder by market value, fell 6.1 percent to 1,170 pence. Taylor Wimpey dropped 6.2 percent.
From next year, allowances under the Funding for Lending Scheme will apply only to business lending and will no longer be available for home loans, the BOE said today. Regulators will also end a measure that allowed banks to not hold capital against mortgages granted under the FLS after house-price inflation gathered momentum and transactions picked up.
“The share prices of the homebuilders have had an excellent move on the back of government stimulus to the mortgage market,” Mark Hughes, an analyst at Panmure Gordon U.K. Ltd., said by phone. “So there’s a lot of logic in the shares moving back, now that this stimulus is being withdrawn.”
The increased capital-retention requirements are “the significant change today,” said Rob Wood, chief U.K. economist for Berenberg Bank. “For higher-risk mortgages, this is more important. It will have a modest effect on the availability and price of higher loan-to-value mortgages.”
The number of mortgages with a down payment of 15 percent or less rose by 80 percent in October from a year earlier, property appraisal firm e.surv Ltd. said in a Nov. 13 report. The rates charged by banks for low LTV mortgages may rise slightly or not at all, Wood said.
The Bank of England introduced FLS in June 2012 to encourage banks to grant more loans by enabling them to gain access to cheaper funding. The level of funds that lenders could draw on depended on how much they were lending to the economy.
“The changes to the FLS may be a surprise, they are not a shock,” Paul Smee, director of the Council of Mortgage Lenders, said in a statement. “Mortgage lenders are well equipped to meet their funding needs, as wholesale funding-market conditions have improved and retail deposits are robust.”
The CML represents lenders that provide 95 percent of all residential mortgages in the U.K.
The changes today don’t have implications for the government’s Help to Buy program, which enables people to purchase properties with down payments as low as 5 percent, the BOE said.
“By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later,” BOE Governor Mark Carney said today.