Bank ends lending initiative to slow house sales surge
The Bank of England took the first step in putting the brakes on the surging property market in some parts of the UK as it scrapped a flagship initiative that encourages mortgage lending.
Governor Mark Carney said the Funding for Lending scheme (FLS) stimulus was no longer needed amid rising house prices, and it would instead be further focused on helping small business borrowing, which remains muted.
The rallying property market Mr Carney has referred to has been most pronounced in London and the south east of England but in Northern Ireland the market remains subdued with prices still down over 50% on average.
Still, Mr Carney raised the spectre of a future property bubble where households over-stretch themselves to be able to buy homes, and said the bank was taking steps now to try to avoid more drastic action in the future.
He said: "The changes announced today refocus the FLS where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed."
The announcement came as the Bank's Financial Policy Committee (FPC) published its latest twice-yearly Financial Stability Report, assessing potential "vulnerabilities" including those that might be posed by an overheating housing market.
It brings to a close a period when the market has been spurred on both by the FLS incentives – giving lenders access to cheap finance in return for providing household loans – and the Treasury's Help to Buy scheme.
Housing market experts said it could spell the "beginning of the end" for rock-bottom mortgage rates. The FPC's report coincided with the publication of a letter from Mr Carney confirming that the Bank has no veto over Help to Buy, though the FPC can make recommendations on it at any time.
That scheme provides £12bn of mortgage guarantees to lenders supplying loans worth up to 95% of a property's value. Critics say that without new supply it could backfire, creating a house price spurt that increases difficulties for new buyers.
The FPC's report noted that while the market was picking up from a low level, house price inflation was already "above historical average" on some measures. Surveys had shown an increase of 6.8% in the year to October.
Risks could grow, should the continuing upturn be accompanied by a further build-up in household debt and weaken further, should lenders loosen underwriting rules to determine if borrowers qualify for a mortgage.
A hike in interest rates would threaten "vulnerable borrowers", especially if the economy remained subdued.