Bank sees no dangerous bubble now

  • 26 June 2014
  • From the section Business
  • comments

So apparently a rise in London house prices of circa 20% per annum is not a serious bubble, according to the Bank of England.

It has announced modest constraints on banks' ability to make riskier loans. But it is highly unlikely that these will have any significant impact on the health of the housing market in any part of the UK, including the booming markets in London and the South East.

The Bank's Financial Policy Committee - created by the current government in 2010 to help prevent a repetition of the 2007-8 financial debacle - is making two proposals to limit the future growth of mortgages that are a high multiple of household incomes.

But these recommendations, if implemented this second, would have no material impact on the behaviour of banks - and are in effect an insurance policy to prevent banks becoming much more reckless in coming years.

'Rising trend'

The most eye-catching plan is to limit the proportion of new mortgages that are 4.5 times income or greater to no more than 15% of any bank's total mortgages.

Which may sound like a significant constraint on banks' commercial freedoms.

But it is unlikely that any of the big banks has ever in the history of banking supplied such a high proportion of high loan-to-income mortgages over any extended period.

Over the last 12 months, no bank has gone over the 15% threshold. And the average for all banks over the past year has been 11%.

That said, high loan-to-income mortgages are a bigger share of the total than their historical norms and are on a rising trend.

The Bank of England would expect banks to hit this threshold by 2017, based on its forecasts for earnings and house prices.

Or to put it another way, this policy is designed to limit the dangerous risks it expects banks to be taking in three years time.

The Bank of England's other recommendation is that banks should check that new borrowers could afford their mortgages if interest rates were to rise by 3% over the subsequent five years.

This is a marginally tougher affordability test than banks currently use, but does not seem materially or economically significant.


Perhaps more eye-catching than the Bank's announcements is the adjustment being made by the Treasury to its Help to Buy subsidised mortgage scheme.

It says mortgages of 4.5 times household income or more will no longer qualify for the scheme.

The Treasury says this makes good the chancellor's promise in his Mansion House speech to adjust the Help to Buy Scheme in line with the Bank's mortgage-market proposals.

But surely the chancellor is going further than the Bank of England, in that the Bank is limiting these high loan-to-income mortgages to 15% of new mortgages - whereas the Treasury is going for zero tolerance of them.

I asked the governor whether the chancellor had gone a bit overboard.

Mark Carney said he welcomed the Treasury's action. But then he winked.