It’s tempting to glance at what the Bank of England has done today and say: “so what”? After all, on the face of it, the two primary measures unveiled by the Financial Policy Committee are hardly likely to make much difference to the UK housing story.
Consider them in turn: there’s the new stress test on mortgage lending, under which a mortgage company will have to ensure their applicants will be able to afford their loan repayments even if official interest rates go up by 3% over five years. Most lenders are already carrying out checks of similar stringency, and have been doing so for months, if not years. After all, 3% is more or less where markets expect interest rates to be in five years’ time anyway.
Then there’s the new limit on big mortgages: in future a lender will have to limit the amount of their “high debt” mortgage lending (the Bank classifies that as a loan worth 4.5 times a borrower’s income) to just 15% of their total book. Again, it sounds sensible, but won’t have any immediate impact. Indeed, currently only about 11% of total mortgage lending is at this level; in fact, had this limit been in place in recent decades, it would never have been breached – even in previous housing booms and crashes.
So is this yet another case of all talk and no action from the Bank of England? As it happens, I think not. In fact, what this represents is the Bank trying to tackle a London housing bubble while leaving the rest of the UK more or less untouched.
As I’ve written before, the Bank is terrified about carrying out anything that looked like regional economic policy. What’s striking about its new rules, however, is that while they are unlikely to have much impact on the average family in the UK, or indeed the average first-time buyer (barely more than 12% of their mortgages are at loan-to-income (LTI) levels of 4.5 times or more), they will certainly affect London.
In London, more than a fifth of mortgages being issued at the moment are have LTIs of 4.5 or above.
In other words, if there is one part of the country where this measure should have an impact, it is the capital. this won’t have an immediate impact: after all, the FPC rules apply to banks’ total mortgage books, most of which are spread across the country. But banks will be likely to continue to restrict their high debt lending, which will disproportionately affect London.
This seems to make plenty of sense. However, it is unclear quite how effective the sanctions will be. This is uncharted territory for monetary and financial policy – and these measures haven’t been universally effective elsewhere.
Nonetheless, it’s welcome to see the Bank re-embrace regional policy – without speaking its name. As I’ve said time and time again, there is no nationwide housing bubble. There is, however, a London property bubble. It is partly fuelled by foreign demand, but it is nonetheless pushing buyers in the capital into greater debt than ever before.
For the first time, the Bank seems to be acting on it.
And here’s my piece about financial policy (and lego, and wind vanes), produced by the brilliant Emily Purser.
What tools can the Bank Of England employ to exert control over house prices? Sky’s Ed Conway reports. SUBSCRIBE to our YouTube channel for more great videos…