SPECIAL FEATURE: BoE shouldn’t rein in market
The BoE’s Financial Policy Committee held its quarterly meeting last week, the results of which will be unveiled on Thursday.
Under the Mortgage Market Review introduced in April lenders must stress test to an interest rate of around 7%, while media reports have suggested that this could be raised.
Other measures that could be taken include changing the Help to Buy Scheme, which incentivises 95% loan to value mortgages and imposing a cap on mortgages in proportion to property value.
Governor of the Bank of England Mark Carney has signalled that the Bank is ready to tackle riskier high loan to value lending if the market is overheating, as the latest ONS data showed that prices inflated by 9.9% year-on-year to April.
But Ray Boulger, senior technical manager at John Charcol, said: “Although the majority of economists seem to think the bank will do something to stem the mortgage market I am far from convinced that this will be the case.
“It’s unlikely that the FPC will announce anything of any significance. It will be much more sensible to wait until September when MMR has had an impact.
“By September when the FPC next meet its impact will be much clearer – it may well be that by then there’s no need to do anything at all.”
John Coffield, head of Paradigm Mortgage Services, said: “I agree with Ray. I think they will put it off for now.
“We are getting to that time of year when things quieten down natural in July and August because of the holiday season and I’m not sure you would be able to tell the difference if we did anything now.
“I don’t think we need to interfere with the housing market.”
However, Paul Broadhead, head of mortgage policy at the BSA, felt that messages coming from the FPC and Carney had to be taken seriously.
“We will have to wait until the publication of the Financial Stability Report to see if any specific action is taken but some FPC action is likely,” he said.
“Given the extensive comments from various members of the FPC it is clear that their focus has undoubtedly been on the housing market, referring to it as the brightest warning light on their dashboard.
“However, the FPC is focused on the housing market from a certain angle – the financial stability risks for lenders if certain cohorts of borrowers over-borrow and then run into repayment difficulties.
“Therefore, the tools used are likely to focus on affordability, eg. the MMR interest rate affordability test.”
RBS and Lloyds have both introduced loan to income lending caps while it is rumoured that Santander will follow suit.
MMR is also putting the brakes on the market as deals take longer to complete.
Ying Tan, managing director of The Buy to Let Business, felt that the market has been tightened up quite enough in recent years.
“There has been so much movement in the last five years that I’m not sure how much tighter it can go,” he said.
“As I understood it Carney and George Osborne are trying to rein in the property boom and make it harder to take risky home loans but to a certain degree MMR has already done that.
“It’s certainly not easy to get financing, you have to prove everything with a fine tooth comb.
“The majority of lenders are stress testing at a rate of 6% and 7%. How far do you take it? There’s plenty of cushion already.”
Paul Broadhead agreed that the Bank should be cautious in further tightening up the housing market owing to measures already in place.
“The BSA Property Tracker (published last week) showed that consumer sentiment has started to cool, and recent approvals numbers suggest the MMR might be having an effect (although this might be temporary),” he said.
“Therefore caution is urged in the deployment of the macro-prudential tools, particularly as they are untested.
“Long-term, a lack of housing supply is the big underlying issue. Consumer sentiment is vital to the health of the UK housing market, so how the use of any tools is communicated is also crucial.”
London house prices have risen by 31% since the last general election, Gocompare figures recently revealed, yet Boulger said constraining lending would barely curb the market in the capital.
Some 40% of properties in London are purchased in cash, meaning restricting lending would not impact that demographic.
If London and the South East were taken out of the question prices increased by 6.3% year-on-year to April, the latest ONS statistics have shown.
Boulger said: “The only part of the property market which can be seen as a bubble is London, and that is slowing down so the market is correcting itself by its own free will.
“It’s hard to see why we would want to curtail property price rises in other parts of the country.
“It would be premature for the FPC to do something now as there’s still a lot of uncertainty in the market.”
And this morning it emerged unexpected spare capacity in the UK labour market is likely to absorbed before any future rate rise, Bank of England governor Mark Carney suggested to MPs.
Carney told the Treasury Select Committee that regardless of timing any increase would be “limited and gradual”.
And he said that the latest data was giving the impression that earnings could soon be on the up, adding that in five years time he expected the base rate to be “materially below” 5%.
But Carney was accused by one MP of acting like “an unreliable boyfriend”.
TSC member and Labour MP Pat McFadden said Carney’s position was “one day hot, one day cold”.
Recently Carney had hinted that a rate rise may occur in coming months.
The FPC results will be unveiled on Thursday.