Chancellor George Osborne announced the new powers during his annual Mansion House speech in London and Bank of England Governor Mark Carney said there could be an interest rate rise as soon as this year.
This comes despite lending and property experts pointing out that the only place where there is the danger of a property price bubble in London but even in the city soaring price growth is softening.
They have also pointed out that in some parts of the UK, most notable the north east and Northern Ireland pries have not yet recovered from the downturn during the recession.
Originally Carney had said that an interest rate rise was unlikely before 2015 and now he says it is imminent, putting up the cost of mortgages for millions of current home owners and raising the cost for potential first time buyers.
‘There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect,’ said Carney.
Osborne said he will push through the new powers before next year's general election as he believes that the Bank should have a full range of alternatives to higher interest rates as a way of cooling down the housing market.
‘I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market. I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust. So I am giving the Bank new powers over mortgages, including over the size of mortgage loans as a share of family incomes or the value of the house,’ he said during his speech.
Until now, the Bank's new financial policy committee has merely had the power to recommend actions to banks and building societies, but it will now be able to directly limit the size of a mortgage in relation to the value of a home or the size of a potential home buyer's income.
Neither the Treasury nor the Bank think there is an imminent risk of a property bubble but both are concerned about the potential for the property market to cause havoc once again with an economy.
‘Does the housing market pose an immediate threat to financial stability today? No, it doesn't. Could it in the future? Yes, it could, especially if we don't learn the lessons of the past. So we act now to insure ourselves against future problems before they can materialise,’ said Osborne.
The chancellor said that it would be up to the Bank to decide on the precise caps on loan to income and loan to value ratios should they be needed. ‘The Bank of England should not hesitate to use these new powers if they think it necessary to protect financial stability,’ he added.
Carney welcomed the Bank's new powers. ‘There are rapids ahead, with old imbalances persisting and new ones emerging. The economy is still over levered. The housing market is showing the potential to overheat. And the current account deficit is now at a record level,’ he explained.
According to Simon Crone, vice president for mortgage insurance for Genworth, a cap on loan to values without any degree of flexibility risks excluding credit worthy borrowers. ‘If the Bank of England is given the power to introduce them in future, then before putting this theory into practice, the Chancellor and the Bank should consider the effectiveness of combining LTV caps with the flexibility to exceed the cap for credit worthy borrowers where an additional guarantee, such as mortgage insurance, is in place,’ he suggested.
‘This combination has worked well internationally in other markets, providing a more effective, sensitive and targeted macro prudential tool. It’s critical to ensure responsible mortgage lending isn’t snuffed out by concern over rising house prices predominantly in and around London, which is its own unique market and bares little relation to the rest of the country,’ he said.
‘Activity already appears to be cooling as a result of new affordability checks imposed by the Mortgage Market Review. It suggests the case for an LTV cap may already be receding, but should the Bank decide to act further down the line, flexibility will be needed to avoid disadvantaging first time buyers nationwide and once more widening the gap between the property haves and have nots,’ he explained.
‘There is nothing fundamentally wrong with getting a loan with a 5% deposit, providing you can afford the mortgage repayments. Past generations have relied on this, and new affordability measures, only introduced in April, are now in place across the market so that no borrower can get a 95% LTV mortgage, or indeed any mortgage, without being able to afford it in the long term,’ he added.
Ed Balls MP, Labour’s Shadow Chancellor accused Osborne of failing to tackle the root cause of the housing crisis which is that not enough new homes are being built to match rising demand.
‘The danger is that we see a premature rise in interest rates to rein in the housing market which ends up hitting millions of families and businesses. You can’t deal with the cost of living crisis and create a strong and balanced recovery without building more homes,’ he pointed out.
He added that Labour has committed to getting at least 200,000 new homes built a year and introducing a Help to Build scheme for small and medium sized builders alongside a reformed Help to Buy programme.
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, does not think macroprudential measures would slow the housing boom effectively and they could actually raise financial risks if they delay a warranted rise in base rates.
‘They’ve been using loan to value caps for residential mortgages in Canada since World War II and the jury is still out as to their impact. We haven’t got much time to spare with the UK economy growing at 3% to 4% and unemployment falling sharply. The longer the Bank of England delays actual rate hikes, the higher rates will end up going,’ he explained.
‘The economy would most likely stay strong in that scenario but a housing led downturn could follow some time shortly after the next general election,’ he added.
