Bank of England curtails Funding for Lending Scheme amid fears of housing bubble
FLS will focus solely on boosting loans to businesses from 2014
The Bank of England has moved swiftly and unexpectedly to puncture a new housing bubble, as it diluted a joint programme with the Treasury which has been boosting mortgage lending.
The Bank has announced that the so-called Funding for Lending Scheme (FLS), which has helped to drive the UK’s recovery, will no longer cover new housing loans extended by banks from next year.
Instead, the FLS from 2014 will focus solely on boosting loans to businesses. Lenders will also have to hold additional capital for each new home loan made, the Bank said, which will make it less profitable for lenders to issue new mortgages.
House prices growth has accelerated strongly this year, with average prices presently around 7 per cent higher than a year ago, and still heading upwards. This has stoked concerns among some economists that a new housing bubble is being inflated, which could ultimately result in a destructive bust.
Until this week the Bank had seemed relatively relaxed about the state of the housing market in recent weeks, with senior officials repeatedly pointing out that the monthly rate of new mortgage approvals was still low by historical standards.
But Threadneedle Street abruptly changed its tune.
“Risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness” said the Governor, Mark Carney, at a press conference. He added: “It is no longer appropriate to have our foot on the accelerator”.
The package of measures, he said, was “collectively significant” and necessary to keep the housing market on a “sustainable path” over the coming years.
“By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later” he said, highlighting Bank research showing that recessions preceded by housing busts tended to be significantly deeper and longer lasting.
The Treasury said the decision to curb the subsidies for home lending was taken jointly with Threadneedle Street and insisted that that the mortgage support element of the FLS had now achieved its primary purpose.
Yet the government has come under fire from economists for its separate Help to Buy programme, which, from last month, provides a state guarantee for 15 per cent of new mortgages extended by banks. Critics have likened Help to Buy (which will be unaffected by today’s changes) to the institutional American government mortgage subsidy infrastructure, known as Fannie Mae and Freddie Mac, which helped to blow up the US housing bubble that burst with catastrophic consequences for the global economy in 2008.
Ministers have claimed at various times that the Bank of England can cancel Help to Buy. But the central bank confirmed earlier this week that it merely has the power to make recommendations to the Treasury over the scheme rather than a right of veto. Today, Mr Carney said it was “still early days” for the controversial programme.
The FLS, which offers cheap central bank funding to commercial banks provided they pass on cheap loans to homebuyers and businesses, has driven up mortgage lending since it was established in the summer of 2012. But net new lending to small firms has continued to fall steadily over the life span of the scheme.
In a letter on the reforms to Mr Carney published today the Chancellor George Osborne said: “I am confident that these changes will build on the success of the scheme so far and will continue to support further easing of credit conditions”.
But Lord Oakeshott, a former Liberal Democrat Treasury spokesman who resigned in 2011 over the Treasury’s refusal to take a tougher line on bank lending and bonuses, insisted that more was needed to support lending to small firms. “If the FLS has been successful on small business lending, how would failure look?” he asked. “This is a step in the right direction, but we must do more to stop the house price juggernaut and get banks lending again, not gambling on property”.
Threat of 'catastrophic cascade of collisions' involving 300,000 pieces of rubbish must be averted, warn scientists
Oxford is the least affordable city in the UK, where houses cost 11 times local salaries
Swarm of killer bees sting woman 1,000 times
Malaysia Airlines Flight MH370: Oil slicks in South China Sea ‘not from missing jet’, officials say
Steve Irwin’s final words: Cameraman present at death opens up about deadly stingray attack for the first time
Oscar Pistorius trial: Athlete repeatedly throws up as court hears 'graphic details' of Reeva Steenkamp's autopsy
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
Exclusive: Impact of immigrants on British workers ‘negligible’
Vince Cable: Teachers 'know absolutely nothing' about the world of work
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
The quiet diplomat: Catherine Ashton - recognised and admired in all the world’s troubled countries, yet ridiculed at home
- 1 Oxford is the least affordable city in the UK, where houses cost 11 times local salaries
- 2 Australian man Rod Sommerville reacts to bite from deadly snake by reaching for cold beer
- 3 North Korea elections: Kim Jong-un wins 100% of the vote
- 4 David Cameron resorts to paying for Facebook fans because not enough people like him
- 5 Steve Irwin’s final words: Cameraman present at death opens up about deadly stingray attack for the first time
iJobs Money & Business
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£55000 - £70000 per annum + benefits: Pro-Recruitment Group: In-House Corporat...
£80000 - £100000 per annum + benefits: Pro-Recruitment Group: In-House Opportu...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...