Chancellor George Osborne has already said that the economy is facing a lot of challenges as the result of the decision to leave the European Union and now after a meeting with the governor of the Bank of England and leading lenders he has sought to reassure the industry that money will be available for property lending in the commercial and residential sectors.
This will allow banks to release £5.7 billion from their regulatory capital buffer to support lending. ‘While we are realistic about the economic challenge facing the country after the referendum result, we are reassured that collectively we can rise to it,’ said Osborne.
‘The last time Britain faced an economic shock the banks were at the heart of the problem.
Thanks to the hard work of rebuilding the banks, making them stronger and safer, and the arrival of new challenger banks, banks and building societies are now part of the solution,’ he pointed out.
‘The government gave the Bank of England new counter cyclical capital buffer powers to support lending in the financial system in the good times and bad. The independent FPC of the Bank of England have today used those powers,’ he explained.
He added that the extra capital is now available to support lending to UK businesses and households and he called for a joint national effort to meet the economic challenge.
It is a major change and means that three quarters of UK banks accounting for 90% of lending will immediately have greater flexibility to supply credit to UK households and firms. To achieve this the Financial Policy Committee within the Bank of England cut what is known as the UK countercyclical capital buffer rat' from 0.5% to 0% per cent of banks’ UK exposures with immediate effect.
It means that lenders have extra money to fund mortgages and corporate loans and this zero rate will apply for the next 12 months, at the end of which the Bank will reassess.
The Bank of England also published its Financial Stability Report, which revealed concerns about the growing amount of debt households are carrying. ‘Survey evidence on the housing market has been difficult to interpret in recent months because of the impact of the pre-announced increase in stamp duty on additional properties which took effect in April,’ the report said.
The report also warned of the potential for buy to let investors to sell up and flood the market with properties which could push down prices down and indirectly hit owner-occupier households' wealth.
It explained that there is a risk that people could be more likely to lose their jobs or fail to find one following the referendum. ‘The ability of some households to service their debts would be challenged by a period of weaker employment and income growth. These vulnerable households could affect broader economic activity by cutting back sharply on expenditure in order to continue to service debts,’ it added.
David Whittaker, managing director of Mortgages for Business, believes it will not necessarily mean cheaper loans. ‘Only those on existing Bank Rate trackers will really benefit. Mortgage pricing is largely dictated by the cost of borrowing on the money markets, and the current uncertainty around liquidity will mean that some lenders will not want to reduce their rates,’ he said.
‘They may even be keen to sustain current rates, or increase pricing in order to regain recent months’ lost margins,’ he explained, adding that the FPC was right to say that there is a downside to buy to let growing unsustainably.
‘I maintain that around 17% of total lending is a sensible size for the sector. While buy to let lending may fluctuate in the short term, there is a very strong core of stable low loan to value (LTV) lending to landlords, which is unlikely to contribute to instability. The current regulatory regime adds to this strength,’ said Whittaker.
‘Ultimately, property will remain an attractive investment, and we are highly unlikely to see any kind of investor exodus on the scale feared by the FPC. Demand for rental accommodation will remain high, and the sector is much more stable as an investment than the wildly fluctuating post-Brexit bond and equity markets,’ he added.
According to Liam Brooke, co-founder of Saving Stream, the announcement is just what the property sector has been wanting to hear. ‘In the past two years, there had been a significant slowdown in lending for both commercial and residential property, especially for new developments, but this announcement should now get the banks to look again at property funding,’ he said.
‘For banks, these regulatory capital constraints have meant that property funding just hasn’t been viable in the same way as it was prior to the recession. Increased lending by banks is also great news for early stage financers of property and the bridging industry, because it should help to keep property prices buoyant,’ he explained.
‘With many experts predicting a cut in interest rates in the coming months, residential and commercial property should also continue to be favoured as a high yielding investment opportunity in the long term,’ he added.
