The Bank of England’s Governor, Mark Carney has today held a press conference to outline new plans to stabilise the housing market under the Financial Stability Report.
The housing market is the biggest single domestic risk to the UK’s economy, and the Bank of England is seeking to encourage long term price stability. Mr Carney was keen to stress that there is no imminent threat, but household over indebtedness due to rising house prices could threaten disposable income/spending power and hence economic recovery. This is why the last recession was so deep and lasted so long.
Current average household debt stands at 140% of income and mortgages account for 80% of this debt being by far and away the largest liability. Mortgages are also the largest single asset class for the UK’s Banks and Building societies.
The Bank of England will therefore:
- Cap Banks to no more than 15% of their mortgage lending being above 4.5 times income, currently this is 10% so will have no immediate affect on borrowers.
- Banks must also asses affordability of a new mortgage based on the current rate plus 3% and again many banks already do this under MMR rules.
- No new Help to Buy loans can be agreed above 4.5 time income
If you have a mortgage agreed yesterday then today it should still be OK under the new rules.
These measures are not designed to have an immediate affect, but are geared to stop any future overheating by limiting borrowing power without needing to increase interest rates.
The Governor said that current Monetary Policy (includes interest rates) does not need to be diverted due to a single sector specific issue. Raising interest rates to curb borrowing would only hurt household spending and hence slow the economy. This way we avoid economically the tail wagging the dog.