14th June 2014
The Bank of England has been warned not to clampdown further on mortgages as lending activity is still too low, despite rising house prices.
The Intermediary Mortgage Lenders Association (IMLA) has highlighted a ‘mismatch’ between housing and mortgage market activity and warned the Bank’s Financial Policy Committee (FPC) not to make any decision based purely on house price growth.
The FPC has the power to rein in the Help to Buy scheme, through which the government offers mortgage guarantees and equity loans to those with 5% deposits, and last night chancellor George Osborne announced the FPC will be given new legal power to limit loan-to-income ratios and cap loan-to-value ratios if it thinks house prices are a threat to the economy.
The FPC is due to meet on Tuesday and is expected to discuss the progress of the Help to Buy scheme. Sharp rises in house prices have fuelled speculation that it will use its powers to try and stem the market to prevent households from becoming over-indebted.
However, IMLA argued that the strength of the property market reflects the growing use of cash to buy property. More than a third, 36%, of house were bought entirely in cash in the first quarter of the year.
In fact the mortgage market remains ‘very subdued’ it said and mortgage debt is shrinking in real terms – households have been putting over £10 billion of equity into their homes every quarter since mid-2010.
IMLA research also showed the average loan-to-value ratio has been ‘exceptionally depressed’ since the financial crisis and the average first-time buyer loan-to-value remains lower than at any point prior to 2007. While the Bank has expressed concern about high loan-to-income loans, IMLA said the stricter affordability rules introduced in the mortgage market review (MMR) will protect households from taking out loans they cannot afford.
It argued that a more established recovery is needed before any new rules are introduced to the mortgage market – which is already trying to cope with the MMR and higher capital requirements.
Peter Williams, executive director of IMLA, said: ‘With understandable concerns over the rate of house price increases in recent months, the FPC faces a difficult task – even more so with the prospect of additional powers at its disposal in the near future.
‘Delving beneath the house price data and the overarching UK averages paints a picture of a housing market where the use of cash has become a key driver. There are broader questions for government about the implications of this, though in part it has been driven by a shortage of mortgages; a situation that is being corrected.’
He added that ‘additional intervention into the mortgage market is not warranted at the present time’.
‘Two conflicting growth stories are playing out,’ he said. ‘House prices are rising strongly in parts of the country as a result of inadequate supply, but mortgage lending is still abnormally subdued. There is room for fine tuning of Help to Buy, but broader action on mortgages might inadvertently shift the balance of power in the housing market even further towards cash-rich buyers.’