Giving the Bank of England or politicians the power to cap loan-to-value and loan-to-income ratios could cause long-lasting detriment to the housing market, warn industry experts.
Last month, the International Monetary Fund called for the Bank of England’s Financial Policy Committee to be given extra powers to prevent another housing bubble.
In an analysis on the UK economy, the IMF said the FPC’s request to have the power to adjust lenders’ capital requirements to control the market might not be enough to stop property bubbles.
It says: “Additional powers should include the ability to limit loan-to-value and loan-to-income ratios, as higher capital requirements alone may be insufficient to restrain property bubbles.”
Before the financial crisis, a relaxation of credit conditions saw lenders lowered their criteria to increase their share of the market.
The result was that many borrowers who would not normally be able to access mortgage finance were able to, even if they had little or no deposit and a chequered credit history.
This led to a rapid increase in house prices. According to Nationwide Building Society, the average UK house price rose from around £133,000 at the end of 2003 to £183,000 at the end of 2007.
The average house price doubled from £92,000 in 2001 to the end of 2007.
BoE deputy governor for financial stability Paul Tucker recently wrote that the power to cap LTVs and LTIs should be left to politicians. The Treasury select committee is undertaking an inquiry into how the BoE can maintain financial stability and why it has shied away from blocking riskier lending.
Deloitte strategic adviser Michael Coogan, who was previously director general of the Council of Mortgage Lenders, says aside from the fact a cap would stop prospective first-time buyers from getting into the housing market, it is likely that existing borrowers would be temporarily unable to switch mortgages.
Coogan says: “Whenever you introduce a new restriction in the market, the risk you run is unintended consequences. In a market with 11 million borrowers, bringing in a cap would affect existing borrowers and the commercial livelihoods of everyone in the mortgage market including lenders, intermediaries and service providers.”
A CML spokeswoman says: “We do not know what, if any, powers will be adopted, if they are, but we would like to see the FPC exercising appropriate caution when considering using these tools and robustly and transparently assessing the market impact of doing so.”
Lentune Mortgage Consultancy director Stuart Gregory says specialist mortgage trade bodies should be consulted before any such powers are used.
He says: “If you give one particular authority that amount of power, it must have a very good understanding of the market it is dealing with. This tool cannot be used as a kneejerk reaction. It would be a good idea to consult bodies like the CML and the Association of Mortgage Intermediaries before making these decisions.
“If the wrong decision is made at the wrong time, then it could put a hold on the mortgage market and the effects could be long lasting.”
Today’s housing and mortgage markets are very different from a few years ago.
Lenders now have less desire to lend at higher LTVs, due to more restrictive capital requirements which make it more costly to lend at this end of the market, and have significantly tightened criteria in anticipation of the mortgage market review, which aims to stamp out irresponsible lending practices.
John Charcol senior technical manager Ray Boulger argues there is no need to give the BoE or politicians powers to cap LTVs as other macro prudential initiatives make a housing boom less likely.
He says: “I do not think the Bank of England should have this tool in its armoury. I think it is far better to have macro prudential controls and not to micro-manage the market.
“The bottom line is that with the bulk of macro prudential regulation we have now got, such as Basel II and III, CRD IV and Solvency II, lenders have less money to lend and it costs them a lot more to lend at higher LTVs. If you superimpose micro regulation, then the detriment will outweigh the benefits.”
But Capital Economics chief property economist Ed Stansfield says: “All the capital regulations and capital controls are fine but they are fairly blunt tools and there is little in them to stop banks deciding they are going to pull out of one form of lending and pile into another.”