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
Sport
sportWWE latest including Sting vs Triple H, Brock Lesnar vs Roman Reigns and The Undertaker vs Bray Wyatt
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor