Carney at Tolerance Limit as BOE Acts to Curb Housing RisksBen Moshinsky
Mark Carney said the biggest risks to Britain’s recovery stem from the housing market as he introduced measures to limit riskier mortgages and prevent an unsustainable buildup of consumer debt.
The unprecedented action was prompted by booming demand for real estate and an increase in high loan-to-income mortgages, with the Bank of England governor saying debt levels put the economy in a vulnerable position. Today’s announcement is the biggest recent effort by a major central bank to tackle the threat of an asset bubble and avoid a repeat of the 2008 financial crisis.
“This is the limit of our tolerance,” Carney told a press conference in London. “Prospects for household indebtedness concern us. Although U.K. households have made progress in repairing their balance sheets, they start from a vulnerable position.”
In the first of two recommendations announced today, the 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 a separate announcement, Chancellor of the Exchequer George Osborne said that all mortgages taken out under Help to Buy, a government program guaranteeing loans to people with small down payments, will be capped at 4.5 times income.
The measures are a test of the BOE’s new macroprudential tools, which it was granted as part of an overhaul of banking regulation by the U.K. government in 2010. 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.
Shares of homebuilders and the pound increased after the announcement, which economists including Philip Rush from Nomura International Plc and ING Bank NV’s James Knightley said were more lenient than the market was anticipating.
“These tentative measures will not significantly impact the outlook for the housing market in the near term,” London-based Knightley said. “Higher interest rates, more aggressive restrictions on lending and a slowdown in foreign appetite for London property will be needed for that to happen.”
Barratt Developments Plc climbed 4.1 percent at 12:18 p.m. London time, Persimmon Plc surged 4.3 percent and Travis Perkins Plc appreciated 3 percent. The pound rose 0.3 percent to $1.7027 after climbing to $1.7063 on June 19, the highest since October 2008.
“We have seen time and again how quickly responsible can turn to reckless,” Carney said. He said policy makers will evaluate the impact of today’s measures and “recalibrate” them if needed.
While the BOE said household debt levels aren’t an “imminent threat to stability,” Carney told reporters that “highly indebted households could pose major direct and indirect risks in future.”
Today’s move represents an unprecedented bid to prevent the U.K. housing market from overheating, eclipsing the BOE’s decision to end incentives for mortgage lending under its Funding for Lending Scheme at the end of last year. Home prices rose 9.9 percent in April from a year earlier, the most in four years, and by almost 20 percent in London, according to official data.
The BOE’s central forecast assumes house-price inflation continues at its current rate for another year before cooling to a rate in line with income growth. The “upside scenario” sees mortgage approvals rise to about 350,000 a quarter and house-price growth accelerating to an annual 15 percent, similar to the pace seen in the early 2000s.
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.
According to the Council of Mortgage Lenders, first-time buyers in London are borrowing almost four times their gross income and the average loan is 200,000 pounds -- almost double the U.K. as a whole.
While Britain’s property market has boomed over the past year, other rules already introduced appear to be having an impact. In a BOE survey last week, some lenders said the changes in the Mortgage Market Review “might reduce approval rates somewhat.”
The FPC is on the front line of the response to the surge in housing demand. With the benchmark interest rate at a record-low 0.5 percent for the past five years, BOE officials have promoted macroprudential tools as the best way to head off potential stability threats.
Official intervention in the housing market in recent decades has been aimed at raising revenue for the government rather than cooling demand. Tax relief on mortgage-interest costs was eroded steadily from 1988 and eventually abolished in 2000 by then Labour Chancellor of the Exchequer Gordon Brown, who regarded the 1.4 billion-pound tax break as a middle-class perk. The introduction of a 7 percent stamp-duty rate by Osborne in 2012 was limited to properties bought for at least 2 million pounds.
How the BOE fares with its policies will be tracked by other key central banks such as the Federal Reserve and the European Central Bank. Fed officials have raised financial-stability concerns at meetings in recent months.
Central banks already experimenting with such policies include Carney’s native Canada. It has been tightening macro-prudential policy since 2008, with steps including minimum down-payment demands and maximum debt limits for insured mortgages. Sweden and Norway capped loans as a share of a property’s value and asked banks to protect themselves against losses. Hong Kong limited the size of loans too and took steps to curb some purchases by foreigners.
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