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Carney cap designed to quell mortgage surge

During a press conference held by the BoE yesterday, Governor Mark Carney issued details of their planned Financial Stability Report announcing the implementation of a series of prudent macro tools intended to help slow down the ever inflating recent UK house price bubble and to prevent an unsustainable build-up of consumer debt.

Full details of the Report can be found here:

http://www.bankofengland.co.uk/publications/Documents/fsr/2014/fsrfull1406.pdf

Over the past four years or so the UK have seen a huge increase in demand for real estate and in the number of high loan-to-income (LTI) mortgages being issued across the region and is deemed by many as putting the UK economy in a potentially vulnerable position. It is these points that have prompted immediate action by the BoE in yesterday’s announcements, thus becoming the first major central bank to tackle the threat of an asset bubble and to attempt to avoid a repeat of the 2008 financial crisis.

In the first of two measures, the Financial Policy Committee (FPC) capped the number of new mortgages by any one lender of over 4.5 times LTI to 15%. Currently, 11% of mortgage lending is attributed to these high loans, but the proportion has been steadily increasing and the BoE, rightly so in our opinion, has taken the decision to limit this number. This should ensure all of its good work in getting the economy back to where it is now is not eroded away by reckless lending, not sustainable once interest rates begin to rise, which at some or another is inevitable.

Mark Carney added, ‘Because it is acting early, the FPC can take graduated and proportionate steps to reduce the risk of more drastic action being required later on’.

Critics, however, are sceptical this measure will be enough, saying it would have failed to prevent the last financial crisis because the proportion of lending at an LTI ratio of 4.5 or over was below 10% before the 2008 crash. A main contributor to the increase in London house prices, which can serve to skew figures quoted for the UK as a whole, are foreign cash buyers and it is said that this measure will obviously do nothing to prevent this number rising and will only serve to restrict the number of domestic purchasers, in turn leading to a big effect on first time buyers, who would undoubtedly be the first demographic affected.

The second measure aimed at lenders was a demand for them to decline loans to borrowers who fail a new stress test that assumes an immediate 3% increase in the benchmark interest rate. The lenders are to assess whether borrowers could afford the repayments should this rise to 3.5% occur.

As a result of these announcements the FTSE saw a jump in the share prices of its major UK house builders, Barratt Developments, Persimmon & Travis Perkins, all closing at or near session highs at the closing bell.

As a further point, the BoE also instructed that there would be no new ‘Help To Buy’ loans issued at over 4.5 LTI either, a more detailed explanation of this Government scheme can be found on lasts months Abshire-Smith post, which you can read following the link below:

http://www.abshire-smith.com/analysis/2014/05/29/can-the-help-to-buy-scheme-be-to-blame-for-the-uk-property-price-inflation/

All in all, it is to be seen whether these measures do serve the purpose of slowing down the UK house price bubble but at the very least it should be reassuring to the UK economy that their central bank is being proactive in attempting to aid the economic recovery with gradual implementations, as an alternative to spooking the public with sudden benchmark rate hikes.

This was evident in the fact that sterling bounced back against the US dollar yesterday, jumping back above the key 1.7 handle again to a high of around 1.7045, now settling down a bit trading steadily around the 1.7030 mark.

 

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