Half Marks

26 June 2014 By George Hay Follow @gfhay

The Bank of England governor had a chance to address galloping UK house prices via macroprudential tools, curbs to UK mortgage guarantee schemes, and dire warnings. All he offered was underwhelming lending rules. That is no way to protect banks in the long run.

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Mortgage lenders are to be prevented from extending more than 15 percent of their total new UK residential mortgages at loan-to-income ratios at or greater than 4.5, the Bank of England said on June 26.

The recommendation, which will apply to lenders that undertake over 100 million pounds of residential mortgage lending every year, was made by the BoE’s Financial Policy Committee. The FPC will now consult on the measure until the end of August, and rules will come into effect on Oct. 1.

The FPC also recommended that mortgage lenders apply an interest rate stress test that determines whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Rate were to be 3 percentage points higher than the prevailing rate at origination.

The FPC said that the implementation of its recommendations was unlikely to change the prospect that house prices would continue to rise more quickly than earnings over the coming year. It added it was not its role to seek to control house prices, or to tackle the underlying mismatches between housing supply and demand in the United Kingdom. Instead it said its job was to guard against risks to financial stability emanating from the housing market.

The BoE gave no specific guidance about the UK government’s Help to Buy scheme. Shares in house builders Persimmon and Barratt Developments both rose 6 percent and 5 percent in response.

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