2nd October 2014
The Bank of England’s Financial Policy Committee (FPC) is set to have its powers extended to allow it to take further measures to avoid another property boom and bust scenario writes Philip Scott.
Under such rules, the Bank would be able to set limits on how much people could borrow to purchase a property and it could stop mortgage providers from giving out potentially unaffordable loans.
In June the Chancellor of the Exchequer George Osborne announced that HM Treasury wanted to grant the FPC additional powers to guard against financial stability risks from the housing market. He said: “I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market.”
In response to the Chancellor request, the FPC has released a statement, which asserted that it has assessed “the form of the housing market instruments that it might require to meet its statutory objectives in the future”.
The FPC said: “Following discussion of this issue at its meeting on 26 September, the FPC recommends that HM Treasury exercise its statutory power to enable the FPC to direct, if necessary to protect and enhance financial stability, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to require regulated lenders to place limits on residential mortgage lending, both owner-occupied and buy-to-let, by reference to:
(a) loan to value ratios;
(b) debt to income ratios, including interest coverage ratios in respect of buy-to-let lending
The FPC asserted that the housing market and mortgage debt can pose direct threats to financial stability through lenders’ balance sheets and indirect threats through household balance sheets.
It added: “A cycle of rising house prices and overextension of credit can act as an amplifier of these risks. The Committee’s concern is mitigating risks from these channels, rather than seeking to manage UK house prices in and of themselves.”
In a bid to cool the UK’s property market, back in June the Bank of England announced measures to introduce stricter affordability checks and limit the amount of higher risk loans offered to borrowers.
It recommended when assessing affordability, mortgage lenders should apply an interest rate stress test that checks whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, interest rates were to be three percentage points higher than the prevailing rate at origination.
In addition, it said the financial regulators should ensure that mortgage lenders limit the proportion of mortgages at loan to income multiples of 4.5 and above to no more than 15% of their new mortgages.
Notably the proportion of borrowers who took out Loan to Income (LTI) multiples greater than 4.5 rose to almost 11% in the three months to March 2014 compared, just under 9% last year and an average of 6.3% in the pre-downturn period of 2005-07.
Susan Emmett, residential research director at estate agent Savills noted that unsurprisingly, LTI multiples are particularly high among those buying higher value properties with mortgage debt, especially in London.
She said: “Almost 17% of buyers spending over £300,000 were borrowing more than 4.5 times income. One in five new mortgages in the capital were above this multiplier, over twice the UK average.
“However, across the market as a whole the Bank expects the share of new mortgages at LTIs at or above 4.5 to be within the newly imposed limit. So, while the cap will not affect lending on a national level, it does highlight the higher levels of borrowing in the capital and hence where banks are likely to tighten their lending to reduce their risk exposure.”