B of E fears housing bubble


HOUSE-BUILDING giant Baratt Homes’ share price crashed by ten per cent yesterday in an immediate response to Bank of England Governor Mark Carney’s announcement that the BofE is to scale back its scheme to boost mortgage loans.

Instead, the money will go to the banks to boost their reserves, and also to allow them to give some aid to small businesses.

Presenting the Bank’s Financial Stability Report at a press conference, Carney warned that an overheated housing market would be a risk to the economy.

He said that the Bank’s Funding for Lending Scheme, launched last year to support would-be homebuyers, will no longer be aimed at householders.

Supporting mortgage lending is ‘no longer necessary’.

Funding for Lending will be refocused on businesses from January 2014.

However, speaking about the government’s Help To Buy scheme, Carney added that it is ‘still early days’.

Earlier, a rift with the government emerged when Carney confirmed that the Bank does not have a veto over the government’s scheme.

Earlier this year, two Cabinet ministers suggested the Bank could decide to stop the scheme, should it wish to do so.

But in a letter to the chairman of the Treasury Committee, Carney said the Bank’s role on Help to Buy is purely advisory.

He said it would be for the government to decide whether to end the scheme.

But he said that the Bank could make recommendations about it at any time.

Presenting the Financial Stability Report, Carney warned: ‘Despite the return to solid growth, financial stability risks remain, including those arising from high levels of indebtedness both here and abroad.

‘Sharp rises in global interest rates could test financial system resilience, particularly if not associated with strengthening incomes.

‘In its risk assessment, the Committee paid particular attention to recent developments in the UK housing market.

‘That reflects the importance of housing and mortgage debt on households’ and banks’ balance sheets.

‘Any housing downturn could affect financial stability both through its direct impact on banks and from the exposure of borrowers more broadly to an economic downturn.

‘Housing activity has picked up from a low level and prices are 7% higher than a year ago.’

He further warned: ‘Risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness.

‘These risks would be amplified if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles.’

Carney went on to say: ‘Authorities are announcing today two new measures.

‘First, the PRA (Prudential Regulation Authority) has decided to end its temporary capital relief on new household lending from the beginning of next year.

‘Second, the Bank and HM Treasury have announced that the Funding for Lending Scheme (FLS) will be refocused towards supporting business lending starting next year.’