Over to the FPC to direct Britain’s Housing Boom – The Sequel

May 14, 2014

Bank of England Governor Mark Carney has securely parked responsibility for controlling Britain’s booming housing market with the Financial Policy Committee.

While presenting the Bank’s quarterly Inflation Report Carney said the first line of defence against risks from the housing market would be to restrain mortgage lending – something that is in the FPC’s remit – rather than adjusting monetary policy and driving up interest rates.

House prices are expected to rise 8 percent this year according to a Reuters poll this week, not far off the 11 percent average pace seen in the year to April.

That rise over the past year prompted BoE Deputy Governor Jon Cunliffe to say it was dangerous to ignore the momentum building up in the market.

“This is a movie that has been seen more than once in the UK,” he said.

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The vast majority of respondents in the poll said the FPC would therefore use some of the untested powers it was granted a year ago to calm financial excesses.

It has already made it harder to get a mortgage, adding rigorous checks on whether borrowers can afford their loans – from looking at pet ownership, golf club membership and even how much steak an applicant eats.

That has had an effect – mortgage approvals fell more than expected for the second month in a row in March.

But what else can the FPC do when it next meets on June 17, the favoured time for action by respondents?

“It will probably try and force banks to reduce loan-to-value ratios and it could try and limit mortgages as a multiple of salary. It could also recommend a further scaling back of the Help to Buy Scheme in the autumn,” said Peter Dixon at Commerzbank.

Melanie Bowler at Moody’s Analytics agreed:

“The committee is most likely to advocate limiting the supply of certain mortgage products, specifically high loan-to-value mortgages.”

But runaway London house price inflation – one property analyst in the poll said they would leap 22 percent this year – may not be contained by that.

In London, multi-million pound top-end properties are often snapped up by rich foreign investors in cash.

Rising house prices in Britain, and particularly London and the South East, are nearly always blamed at least in part on a lack of supply.

But calls for “new-build” properties to fill in that void weren’t likely aimed at the 22 million pound property that has just hit the market in north London.

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