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BoE threatens tough curbs on mortgage lending to prevent housing bubble

The Bank of England is threatening to impose tough new curbs on mortgage lending as it seeks to head off a future housing bubble.

In the financial policy committee’s quarterly Financial Stability Report, published today, it says there is no “immediate threat” to financial stability from the housing market but issues a series of warnings about the quality of mortgage lending and funding.

The report says the Bank could tackle a house price bubble with tougher capital rules in targeted areas alongside loan to value and loan to income caps.

The warnings come on the same day the Bank brought forward the end of Funding for Lending on mortgages by one year to January 2014.

Council of Mortgage Lenders’ data shows mortgage lending rocketed 37 per cent year on year in October, its highest level in five years. Knight Frank and Savills’ house price surveys, both published this month, forecast house prices to rise by a quarter in five years.

The FPC report says mortgage lending remains subdued compared to historic levels but there is evidence underwriting standards are beginning to slip.

Loans are being offered at higher loan to income ratios and posing a risk to financial stability if interest rates rise from record lows, it warns. 

There are also major concerns that rapid house price rises could mean banks again become reliant on short-term wholesale funding in an echo of the financial crisis.

Northern Rock’s over-reliance on short-term money to fund long-term loans was a key reason behind its demise.

The report says there are concerns mortgage lending could become “inadequately capitalised” causing losses in a downturn.

The FPC set out a series of tough measures to tackle the problems. It says it will “closely monitor” house price rises compared to affordability and sustainability as well as underwriting standards on residential mortgages.

It will also be watching lenders’ exposure to highly indebted households and lender reliance on short-term wholesale funding.

It warns it could hit lenders with higher capital to curb specific mortgages or to cover entire portfolios. It also has the power to impose loan to value or loan to income caps and is encouraged by their use in other countries.

In addition the FPC also calls on the FCA to force lenders to stress test mortgage borrowers over future interest rate rises and to track affordability.

The report says: “UK housing market activity is picking up from a low level and inflation in house prices — which is already above historical averages on some metrics — appears to be gaining momentum. At present, activity remains below  long-term trends and underwriting standards are materially higher than before the crisis. There is little evidence of an immediate threat to stability.

“But risks may grow if stronger activity is accompanied by further substantial and rapid increases in house prices and a further build-up in household indebtedness, which is already elevated for some households. These risks would be accentuated if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles. In addition, the pace of increased mortgage lending may place greater reliance on short-term wholesale funding.”

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  1. This seems a very good move from the Bank given the current risks. The evidence from the latest BIS research on the effectiveness of many of the usual macro-prudential tools to stabilise house prices is far from encouraging. See link below to BIS paper below which reviews the experience across 57 countries. …..http://www.bis.org/publ/work433.pdf.

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