Bank of England wins power to cap mortgages
Chancellor announces measure to prevent housing bubble in his annual Mansion House speech
Andrew Grice has been Political Editor of The Independent since 1998. He was previously Political Editor of The Sunday Times, where he worked for 10 years, and he has been a Westminster-based journalist since 1982. His column, Inside Politics, appears in The Independent each Saturday.
Thursday 12 June 2014
The Bank of England is to be given new powers to cap the size of people's mortgages to prevent a housing bubble, George Osborne has announced.
In his annual Mansion House speech, the Chancellor said the Bank will be able to limit the size of mortgage loans as a share of the borrower's family income or the value of the property. Speaking at the same event, Mark Carney, the Bank's Governor, hinted that interest rates could rise later this year - sooner than the City of London expects. He admitted that an increase could push some homebuyers with big mortgages into difficulties.
The Bank will be able to limit the proportion of high loan to income mortgages each bank can lend, or ban all new lending above a specific loan to income ratio. Any caps will apply to every mortgage guaranteed under Government's controversial Help to Buy scheme.
Mr Osborne told his City audience there was “no immediate cause for alarm” about the housing market but admitted: “There are on the horizon things that should give us some causes for concern.” If London prices grew at current rates, that would be “too fast for comfort,” and average loan to income ratios had risen to new highs.
The Chancellor declared: “I'm not going to opt for the easy route of some of my recent predecessors: duck the issues, risk a housing boom, and keep my fingers crossed that it won't damage the economy.” He said Britain must learn “the lessons of the past” and “act now to insure ourselves against future problems before they can materialise.”
He pledged to build up to another 200,000 homes by changing planning rules. Councils will be required to put in place pre-approved planning permissions on more than 90 per cent of brownfield sites previously used by industry that are suitable for housing. A £5m fund will help local authorities create the first 100 sites. Ministers plan to allow developers to apply directly to central government where councils have not done enough to remove planning obstacles on brownfield sites.
On Friday, Mr Osborne and Boris Johnson, the Mayor of London, will set out plans for new housing zones in London. They will be extended across the country with almost £500m of funding.
Admitting that “much more” needed to be done on housebuilding, Mr Osborne said: “I will not stand by and allow this generation, many of whom have been fortunate enough to own their own home, to say to the next generation: we're pulling up the property ladder behind us.”
The Chancellor did not announce specific mortgage limits. But Vince Cable, the Liberal Democrat Business Secretary, said he was “appalled” to discover that some lenders were granting mortgages worth five times the buyer's salary. “It is crucially important that the banks don't throw petrol on the fire,” Mr Cable told BBC Radio 4. “Most of us who have been through various housing booms in the past have recognised that a kind of stable level is three or three-and-a-half times.”
Mr Cable's remarks irritated Mr Osborne, who believes mortgage caps should not be decided by politicians but by the Bank's Financial Policy Committee (FPC).
State-backed Lloyds and RBS are already declining mortgages of more than £500,000 where it would be more than four times the buyer's earnings.
Later this month the FPC will discuss the housing market and could announce some immediate curbs.
Mr Osborne promised that a new law allowing the Bank to impose caps would be in place before next year's general election. At present, the FPC can recommend curbing mortgages by loan to value by asking the Prudential Regulatory Authority or the Financial Conduct Authority. The legislation will give the FPC the power of direction, so the two bodies could not challenge its decision.
Mr Carney welcomed the Chancellor's plans. He said: “The increase in house prices in the past year means we can expect the proportion of high loan-to-income mortgages to grow further in the coming year even if the housing market begins to slow. This is concerning because a durable expansion requires mortgages to be serviceable over their lifetime not just when interest rates are at record lows.”
Ed Balls, the shadow Chancellor, said Mr Osborne was “behind the curve”, adding: “The danger of the Chancellor's failure to act on housing supply is that we see a premature rise in interest rates to rein in the housing market which ends up hitting millions of families and businesses.”
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