28 Nov 2013

Bank of England: time to burst the housing bubble?

A flagship scheme to boost loans for mortgages will be scaled back by the Bank of England in an attempt to head off a potential housing bubble, as Faisal Islam reports.

As figures suggested the housing market was showing a turnaround, Mark Carney, the governor of the Bank of England, said that the funding for lending scheme would now be directed towards credit for small businesses and individuals rather than for householders.

The scheme was launched last year by the Treasury and the Bank of England. It offers cheap finance to banks and building societies to encourage loans.

But with house price inflation already “above historical average” on some measures, according to a financial stability report released by the Bank, the scheme will be rolled back from January when it no longer apply to household loans.

The concern is where this could go. We definitely see some short-term momentum [in the housing market]. Mark Carney

Housing experts suggested that the scrapping of the scheme signalled the beginning of the end for rock-bottom mortgage rates.

“We did not see an immediate threat coming from the housing market but we are concerned about the prospective evolution of the housing market,” Mr Carney said. “The concern is where this could go. We definitely see some short-term momentum.”

The changes do not affect the Treasury’s help to buy scheme, which helps potential buyers to get loans of up to 95 per cent of a property’s value. Earlier this week, Mr Carney also raised the risk of a housing bubble when he told MPs on the Treasury select committee that the Bank had not seen “a marked improvement in the supply of new homes” following help to buy.

Funding for lending has already been revamped once this year to try and help small and medium enterprises (SMEs). The amount of cheap finance lenders could access was multiplied.

Loans for small businesses will now be subject to lower fees.

Shares in housebuilding fell sharply after Mr Carney’s unexpected announcement on funding for lending. Persimmon and Taylor Wimpey, leading players in the sector, saw shares tumble by 7 per cent.

David Hollingworth, of the mortgage advisers London and Country Mortgages, described it as a “significant” development for borrowers who have become used to ultra-cheap deals.

“Funding for lending has been vital for mortgage availability and competition, which knocks on into affordability because it improves the rate on offer,” he told Channel 4 News.

“At some stage or another, there was going to have to be an exit for funding for lending. That’s come sooner than anticipated.

“I think we are at the bottom [of cheap rates] already. If we’re going to stop making cheap money available to lenders for mortgages, we can only assume that’s going to put upwards pressure on mortgage rates.”

Shock to the system?

But the Council of Mortgage Lenders said the announcement would not be a shock to the system as funding available on wholesale markets has improved.

Paul Smee, director of the Council of Mortgage Lenders, said: “Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust.”

Mr Carney said that over the past year, the scheme had contributed to the recovery by helping to significantly improve credit conditions, “especially for households”.

He added: “The changes announced today refocus the funding for lending scheme 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 Chancellor George Osborne said that now was the right time to turn the scheme’s firepower on small businesses.

He said: “Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focusing the funding for lending Scheme to support them.”

However Labour claimed the announcement was an admission that FLS had “badly failed” businesses, adding that homeowners would want to be reassured that it would not mean a rise in mortgage rates for them.