Funding for Lending Scheme withdrawn for household market

by Neil Patterson

9:42 AM, 29th November 2013
About 5 years ago

Funding for Lending Scheme withdrawn for household market

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Funding for Lending Scheme withdrawn for household market

The Bank of England have withdrawn their support for the Funding for Lending Scheme, but only to the household market.

The Funding for Lending Scheme (FLS) has been successful in reducing the cost of lending for banks in the mortgage market and contributed to a fall in the cost of borrowing to homeowners. However the Bank of England (BoE) have decided to pull back on stimulating mortgage lending by stopping the FLS scheme which allowed banks to borrow £1 from the BoE at very low rates for every £1 they lend to households.

The concern is the impact a fall in house prices would have on household and bank balance sheets if average household debt was to continue to rise. This was triggered by the latest three month figures showing average  house prices have increased by 6.9%. The BoE did comment that this was mostly localised to the South East, but they were “concerned about the prospective evolution of the market in the absence of some of these changes.”

The potential risk to UK financial stability as borrowing grows in the housing market is a consideration rather than an immediate fear and why it is prudent to take the foot off the accelerator now, but since the credit crisis the Banks have all recapitalised, so the long term risks to their balance sheets and a future crises is now much lower.

£17.6bn was withdrawn under the FLS in 11 months by banks and building societies, but lending to businesses continues to decline.

The FLS will continue to provide support to business lending by offering £5 of cheap BoE funds for every £1 banks lend and with the target for these funds skewed towards SMEs.

Mr Carney said “the changes announced today refocus the FLS where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”

The Bank of England are being cautious with the continued recovery not to over stimulate one market by using the tools they have at their disposal with a light touch.

As ever though it is always more complicated with London being the driver of the market growth and a unique economic micro climate compared to the rest of the country. Might a possible alternative or additional solution be making foreign investors pay Capital Gains Tax. This would certainly take some heat out of the London market and increase tax revenues, but by how much, and do we need foreign investment into the country more than the problems it causes in one localised market.

Answers on a postcard please (well actually comments below would be easier).Funding for Lending Scheme



Comments

Mark Alexander

11:55 AM, 29th November 2013
About 5 years ago

I think the BoE are making a mistake here by taking such a broad brush approach. My preference would have been for them to withdraw Funding for Lending support for mortgages in areas in which the housing markets are over-heating, e.g. London.

Other areas of the Country still require stimulus to release "mortgage prisoners".
.

Neil Patterson

12:12 PM, 29th November 2013
About 5 years ago

Good idea Mark 🙂 It would be difficult to police where the money goes though.

EG Mark Bank lends 5 billion all over the country. Bank of England now give you £1 billion of cheap money to lend that goes in your account and balance sheet.

Now how do you prove what you lend in London was not any of the £1 billion.

It may be technically possible some how, but the red tape would be horrendous.

Plus you then get into regional politics and BoE will avoid anything politically controversial.

Mark Alexander

12:16 PM, 29th November 2013
About 5 years ago

Reply to the comment left by "Neil Patterson" at "29/11/2013 - 12:12":

I agree with all of this, however, the removal of the scheme is controversial in it's own right with so many mortgage prisoners outside of London.
.

Neil Patterson

12:34 PM, 29th November 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "29/11/2013 - 12:16":

The Good news is that the Bank of England are now using a tool box with a range of options rather than just a blunt knife that is the Base Rate.

The more they get involved the more they will court controversy. It will be a very fine line to balance, but by all accounts Mark Carney has been very successful in the past and I can see the logic in everything he has done so far.

I will soon say if I disagree with anything, but for now my signed fan poster is still up on the bedroom wall 🙂

DC

13:36 PM, 29th November 2013
About 5 years ago

There are two directions in which this plan can lead our fragile economy and deep recession is one of them!
I thought the government were trying to stimulate the housing market, which unless you look at London, is still in a very flat and virtual no growth situation.
Neil I hope your faith in Mr Carney turns out to be well placed.

Neil Patterson

13:52 PM, 29th November 2013
About 5 years ago

Reply to the comment left by "DC " at "29/11/2013 - 13:36":

Hi DC,

You need to separate the Government (who are political) and the Bank of England (who are purely target driven).

The Bank of England don't care any more about the housing market than they do the energy market. It is just a cold look at balancing economic growth.

Mark Carney can only try to influence what is within his remit in an effort to keep inflation at 2% GDP at 2-2.5% growth and unemployment down to below 5 million.

I am sure like me or you if he was PM he would do everything differently.

DC

14:06 PM, 29th November 2013
About 5 years ago

Hi Neil,
As I said, I hope your gut feelings are right about him but he more than anyone else is in such a powerful position to affect how our economy pans out and this particular idea in my opinion may cause a knock-on effect with regard to inflation if lenders have to put up their interest rates and landlords have to pass on added costs to their tenants etc.
And there are many other reason why this idea may backfire in such a major way, not to mention more lenders jumping on the tracker rate con!

Neil Patterson

14:26 PM, 29th November 2013
About 5 years ago

Reply to the comment left by "DC " at "29/11/2013 - 14:06":

Yes you are correct DC,

It is possible you will get mortgage rate creep upwards hence increasing the cost of living and inflation which the BoE are trying to keep at 2%.

However it is always more complicated than that. If you strip out external and extraordinary inflationary pressures the figure is actually below 2% please see my article http://www.property118.com/bank-of-england-inflation-report-and-what-it-means-for-interest-rates/55610/

The economy is now growing at a predicted rate of 2-2.5% and so we need to unwind or slow down stimulating money supply which we needed to while the economy was contracting eg £375 billion of QE. You need to slow down the stimulus long before you realise you have a problem or it will be too late.

It is also unusual to have such a precision tool to target one market (housing) which is already on the early warning list of being over stimulated.

Then you have the argument that this will effect the construction industry, services, B&Q the list is endless.

Then why is the housing market over stimulated. Is it because of easy credit (I doubt it) or is it Lack of supply (more likely) and foreign investment (also a factor).

There is very rarely (almost never) a right or wrong answer as economics is a social science and the economy is like a living breathing eco system with all factors affecting each other.

Ok now I have made my own head hurt, but at the end of the day some one has to take the tough decisions and go for it.

DC

14:57 PM, 29th November 2013
About 5 years ago

Reply to the comment left by "Neil Patterson" at "29/11/2013 - 14:26":

I always read your posts with great interest and I like your views and interpretations on the topics that you chose to bring to the Property118 site. I also understand what you are saying in respect of factors having an effect on other areas of the economy too.

In respect of Carney using a precision tool to control this area of the economy though I go along with Mark's earlier comment that suggested the tool be used with even more precision in this particular case. If it were possible it should not be used to throw a net over the whole of the country with its very differing housing market fortunes but that it should have been directed more towards the hotspot areas.

We always get a headline figure telling us that house prices have risen by x percentage but hardly ever get told the full picture that other areas have dropped by a certain percentage. The withdrawal of the FLS may indeed bring that headline rate down but it will probably also bring down the other area percentage rates by the same relative difference.

Tampering with the housing market in such a directed way could turn out to be very dangerous and if done in isolation like this it could have a very unfair and nasty effect on certain areas of the country that are already at breaking point.

That's my opinion but as I said, I do respect your more qualified reasoning and I hope your view of the end result in conjunction with other guiding forces produces the balanced outcome that I would hope they are trying to achieve at the BofE.

Neil Patterson

15:31 PM, 29th November 2013
About 5 years ago

Reply to the comment left by "DC " at "29/11/2013 - 14:57":

Hi DC,

I hear what you and Mark are saying about the housing market, which makes perfect sense in an ideal world.

However, like you I know the BoE are not big fans of artificially manipulating markets, which is why their cautious withdrawal does not surprise me.

I don't think they are really fans of the Help to Buy scheme either. The argument is that in a mature free market you need it to find its own long term solution rather than rely on a sticking plaster that you will take of after a little while.

Ultimately by thinking you are helping the market you may be causing its recovery to take longer.

EG withdrawal of FLS could now have some negative effects, but maybe better now than too late.

Economics is so much fun to debate, but I really wish I wasn't still talking about the recession 5 years later!

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