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”.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
Markus Persson: If being that rich is so bad, why not just give it all away?

That's a bit rich

The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

Coleman on course to end half a century of hurt for Wales

Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference