The Bank of England have withdrawn their support for the Funding for Lending Scheme, but only to the household market.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£17.6bn was withdrawn under the FLS in 11 months by banks and building societies, but lending to businesses continues to decline.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).