Carney’s Loan Cap Seen as Too Weak to Stifle Housing BoomJennifer Ryan
Bank of England Governor Mark Carney may need a bigger weapon to subdue risks from Britain’s booming property market.
Faced with house-price increases of almost 20 percent in London and calls to prevent a bubble from threatening financial stability, Carney said yesterday the bank would impose a cap on loan-to-income ratios and other limits on mortgages. BOE projections show the measures will have no immediate effect on mortgage approvals and prices, which jumped about 10 percent nationally in the past year.
Carney’s approach, while marking an unprecedented step into the housing market for U.K. authorities, was less severe than analysts had anticipated. With the BOE acknowledging the outlook for the market is “uncertain,” more restrictions may be needed to prevent Britain from returning to the boom and bust housing cycle that scarred previous decades.
“In terms of arresting increases in house prices it’s a chocolate fireguard,” said Tom Vosa, an economist at National Australia Bank in London. “By being cautious the bank isn’t trying to over worry the market and is waiting to see what happens. That means there may be further measures down the road.”
The BOE’s Financial Policy Committee said lenders must limit the proportion of mortgages at 4.5 times income to no more than 15 percent of their new home loans. It also said banks must decline loans to borrowers who fail a new stress test that assumes an immediate 3 percentage-point increase in the benchmark rate.
In the past year, about 10 percent of loans had a loan-to-income ratio of 4.5 times or above, compared with 6.5 percent in the two years before the financial crisis. The 15 percent ceiling will begin Oct. 1, though mortgages approved before that date will be counted if not completed by the end of September.
The BOE’s central forecast published yesterday assumes house-price inflation continues at its current rate for another year before cooling to a pace in line with income growth. From now until the first quarter of 2017, prices will rise 20 percent, according to its central case, less than the 39 percent increase from 2003 to 2005.
The BOE sees a risk of faster housing gains in what it calls its “upside scenario.” Under those assumptions -- which yesterday’s action is intended to head off -- values surge 45 percent over the next three years, stretching affordability and increasing the proportion of riskier mortgages.
The loan-to-income cap ensures that “if we were wrong about that, if for some reason price growth is faster because of expectations of individuals or income growth is not as rapid because the labor market takes longer to pick up, that the slide into riskier lending is limited,” Carney said yesterday.
Britons owed a record 1.28 trillion pounds ($2.2 trillion) on their homes in April, equal to about 76 percent of gross domestic product, BOE figures show.
“While at least doing something, the measures announced are modest,” said Matthew Poynton, an economist at Capital Economics in London. “Overall, this package seems like something of a missed opportunity. It increases the risk of a prolonged period of above-earnings increases in house prices, which are already overvalued on most metrics.”
Some economists were disappointed that the BOE imposed no regional restrictions. For instance, the share of mortgages with loan-to-income ratios more than 4.5 percent could rise in London without exceeding the national limit. The Land Registry said today that London house prices rose an annual 18.5 percent in May. Values in England and Wales rose an average 6.7 percent.
Carney, 49, said there are other measures the bank could take to cool the housing market. These include adjusting the loan-to-income cap, making recommendations on the types of mortgages that banks extend, including on the amortization period or loan-to-value measures, or changing capital requirements. The BOE has said it will raise the key interest rate, now at a record-low 0.5 percent, as a last resort.
Carney said in a BBC interview today the BOE could begin to raise rates this year or 2015. Increases, when they come, will be “limited and gradual” and the “new normal” would be below the historical average of about 5 percent, he said.
Yesterday’s move eclipses the BOE’s decision to end incentives for mortgage lending under its Funding for Lending Scheme at the end of last year. It also highlights the breadth of the BOE’s new powers after the government in 2010 gave it new macroprudential tools and bank oversight powers as part of an overhaul of banking regulation.
Carney, who joined the BOE from the Bank of Canada and is the first foreigner to lead the institution, is exercising the FPC’s powers as his first year at the central bank draws to a close. He joined the bank on July 1.
Carney’s new limits may not be enough to tame risks emanating from the capital, where a shortage of properties and overseas buyers using cash are driving up home prices.
Homebuilders are constructing more properties to take advantage of a shortage in the south of England. Home registrations by companies, made before construction begins, rose an annual 4 percent to 37,975 in the three months through May, the National House-Building Council said. The biggest increase was in the South East, where 35 percent more properties were registered. In London, there was a gain of 1 percent.
The BOE measures “will have a minimal impact on London,” said Sue Foxley, research director at Cluttons LLP in London. “We ought to make sure we provide people with homes, which is where we’re failing. We need to be more radical in terms of increasing the supply of homes in London and the southeast and take a strategic planning approach.”
The structural problems in the property market don’t necessarily fall under the BOE’s control.
“The provision of affordable homes isn’t under the Bank of England’s remand, it’s a problem for government,” said Azad Zangana, an economist at Schroder Investment Management in London. “All the bank can do is manage the monetary environment as best it can, working efficiently to provide access to credit. It shouldn’t be there to ensure members of the population can exceed appropriate lending measures.”
(An earlier version of this story corrected the wording of a quotation.)