SPECIAL FEATURE: Stability, not housing policy
So, the historic moment has been reached. Macro-prudential tools are now being used to influence the mortgage market, and hence financial stability, the wider economy and – or so it feels – life, the Universe and Everything.
What will it all mean in practice? Can it ever again be Glad Confident Morning in the mortgage market? We think so. I have talked before of the need for lasers, not blunderbusses. In my view, we are at the laser end of the spectrum.
Clearly, a period of consultation and reflection now ensues. There is detail and it may well contain devils (not all of which its authors will have intended). But in the spirit of instant reaction, we offer the following early thoughts, based on the Financial Stability Review and today’s announcements:
These are acts of future-proofing the market, not stamping on current practices. The Bank is very clear that it does not see behaviour in the mortgage market as an imminent threat to stability – but it wants to act pre-emptively to be sure that a creep towards higher indebtedness does not store up problems for the future. This is not a story about current irresponsible lending.
Moves on stress tests link to moves on LTI ratios. The Bank points to one of the concerns underlying its new “assume 3% higher” rate requirement for stress testing – if rates rose by 3% it says that nearly 20% of mortgaged households would have to curtail their spending or seek to earn more, while for households with mortgage income multiples of 4.5 or more, the proportion that would need to act rises to around 50%.
One objective is to target outliers. The Bank also says that most major lenders are currently stress testing at an interest rate of around 7%, compared with SVRs around 4-4.5%, implying a “stress” of around 2.5-3%, above current market expectations of an implied increase of around 2.2%.
It observes “…this level of stress seems prudent” and that the impact of the new 3% requirement should therefore be “relatively small”. But it adds that the step “should help to reinforce prudent standards currently reinforced by most major institutions”.
In policy speak, this is the equivalent of saying that this change is about a reduction of outlier risk, not a cross-market warning.
The moves chime well with the industry direction of travel. Some lenders have already acted to reduce high loan-to-income (LTI) lending on larger new loans.
And the 15% limit for the number of new loans that lenders may advance at income multiples of 4.5 or above will have an effect on the London market far more than everywhere else. Across the UK as a whole, our data suggest around 9% of loans in the first quarter of 2014 were for 4.5 times income or more. In London, however, the proportion was 19% or thereabouts.
If we read between the lines, the Bank is hinting it will be keeping a beady eye on the London market, and on the lending occurring within it, as it sees one possible impact of the new 15% limit as lenders choosing “to focus their share of high LTI mortgage lending towards higher-value transactions.”
Speaking in eyebrows, the report goes on to say “The FPC, with the PRA, will monitor such developments and take action accordingly.”
This is about financial stability, not housing policy. These are Bank actions to safeguard financial stability and promote economic stability.
They are not – and should not be seen as – a proxy for Government housing policy. These are not the tools for other policymakers, tasked with crafting a comprehensive, well-honed housing market strategy.
The Bank has reached into its toolbox and pulled out a spirit level, designed to ensure financial and economic stability stay on the level. Which is measured, and sensible and their job.
But if we were looking for those responsible for housing policy to reach into their own toolbox to address the underlying need to narrow the gap between people who need homes and the number of homes available, then we would see them up a ladder, trowel and mortar in hand, firmly shouldering a hod full of bricks. And that issue was not on today’s agenda.