The Bank of England now has all the powers it wants to prevent the UK housing market posing a threat to the economy.
George Osborne promised in his Mansion House speech back in the summer that he would give Mark Carney any weapons he required to guard against another debilitating boom-bust in the residential property sector.
Carney has taken the chancellor at his word and asked for the right to direct lenders to limit home loans in terms of both the size of the loan relative the value of the property and the level of debt relative to income. Up until now, the Bank has only had the power to recommend but will now have the ability to act instantly if it sees a threat to financial stability.
One obvious question is why Threadneedle Street was not armed in this way when its financial policy committee was set up by Osborne? The answer is that at the time, it was thought the political ramifications of giving the Bank’s governor such wide-ranging powers had not been fully aired. Now they have been.
A more important question is whether the modern version of what used to be known as credit controls are necessary. After all, the housing market has cooled since the FPC recommended back in June that lenders restrict the amount of high loan-to-income borrowing.
But the concern is that the impact of guidance – even when forcibly given – might prove to be only a temporary corrective to the housing market. Given Britain’s three major property bubbles since the early 1970s, this is a sound judgement.
What’s more, the ability to clamp down on lending without delay is an important one. Those with long memories may recall the way in which the housing market boomed out of control in 1988 after Nigel Lawson announced in his March budget that double mortgage tax relief would be scrapped in August.
Until the financial crisis of 2007-08, the Bank’s governor really had only two ways of influencing the housing market: the power of his pronouncements and the blunt instrument of interest rates. Carney rejected some controls but now has a suite of powers at his disposal.
In its annual review, the Bank said it saw no reason to make changes to the chancellor’s Help to Buy scheme, which offers subsidised mortgages on properties – including buy-to-let homes – up to a value of £600,000.
With an election only seven months away, a call by the Bank for HTB to be reined in would have been a politically charged move, particularly since the scheme covers only a relatively small part of the mortgage market, for the most part outside of London.
That said, the extra powers also mean extra risks for the Bank. Carney will no longer be able to say that he would have been able to prevent a housing boom-bust had he only been given the powers. If things go pear-shaped, he will get the blame.
