Yesterday, Mark Carney announced two new FPC recommendations reining in the mortgage market.
The first is that lenders should check that borrowers would still be able to afford their mortgage repayments if the Bank of England rate rose by 3 percentage points (at the moment, from 0.5% to 3.5%). The second is that mortgage lenders should limit the proportion of new mortgages that are 4.5 times the borrower’s income or more to 15%.
This is a pre-emptive move. The Bank of England itself says so. Lenders are broadly already adhering to stricter lending standards, especially following implementation of the FCA’s Mortgage Market Review which require stricter affordability tests. Only 11% of new mortgages are over the 4.5 multiple, and did not hit the 15% level even in the boom years, as can be seen in the chart below, taken from the Bank of England’s Financial Stability Report.
So the new rules won’t bite yet. Much has been made of the likely negligible impact on house prices, which in the past year have started to take on bubble-like proportions, especially in the London area, where prices have hit an annual growth rate of 18%. If regulators really wanted to do something to pop the bubble, they could have imposed a loan to income rule on London specifically. That certainly would have had bite: in London, the proportion of new mortgages over the 4.5 loan to income limit is over 20%. Or it could have gone for a much lower ratio: in Norway, the guidelines put the limit at 3. But that would bite too hard in the UK, where over 50% of new mortgages would breach the limit, as shown in another chart from the Bank of England’s Financial Stability Report below. The short-term financial stability consequences could be drastic, to put it mildly.
But therein lies the key point. George Osborne has been keen to stress that the Bank of England is keeping an eye on emerging house price bubbles. But the Bank of England is not here to care about house prices. Its remit covers financial stability. That means that it is concerned about whether banks are lending sensibly or not. It is worried about over-indebtedness among households that could lead to high default rates, impacting banks’ balance sheets. It is only worried about housing affordability insofar as it may affect financial stability.
In any case, even if the Bank of England tightened further, it would at best cause a short-term shift in prices, but the long-term direction would still be up. Fundamentally, we are not building enough homes. We are currently building the region of 110,000-130,000 homes a year. We need around double that to fulfil expected demand. On these figures, the fundamentals mean that house prices can only go up. And worse, the gap between supply and demand, especially in London has turned housing into a lucrative asset class for investors around the world. Where else could you get the types of returns available on the London property market?
We can’t rely on the Bank of England to solve the housing affordability problem – it’s not in their remit and they don’t have the powers to do it. Only Government can solve the problem by getting more homes built. And that requires some tricky political manoeuvring.