Can the Bank of England curb the housing bubble?

 
Houses in London

It is a big day for the Bank of England, the first time its new Financial Policy Committee is expected to exercise powers to stem overheating in a part of the economy that could destabilise banks and the financial system.

As you all know (you ought to by now, for gawd's sake), the bubblicious market of concern to the Bank's boffins and regulators is the housing market in London and the South East, where prices have been rising at dangerously fast rates (circa 20% per annum in the metropolis).

Here's a little film I made yesterday about what is going on in London and what the Bank of England is likely to do about it.

The dilemma for the Bank is how to snuff out dangerous price rises in London without killing off the green shoots of a much milder housing-market recovery in the rest of the UK - in that a gently rising housing market in most of this country would not be such a bad thing.

What I would expect the Bank to announce is:

1) a proposed formalisation of the voluntary restrictions announced by Lloyds and RBS, viz a prohibition on mortgages greater than four times household income for loans of more than £500,000 - because in most of the country outside London and the south, there are relatively few houses worth more than that.

2) a tightening up of the so-called affordability test banks apply to anyone requesting a mortgage, to ensure they can keep up the repayments in the event mortgage rates rise to 7%.

There is an outside chance banks will also be asked to hold more capital as a protection against possible losses on new mortgages that are a high multiple of income or a high proportion of a home's value.

Now this may take some of the steam out of the London market. But it is important to make two caveats.

First, this is new ground for the Bank of England and the UK, so we can't be certain what the precise impact of these mortgage curbs will be.

Second, much of the London market is being driven by cash buyers - and the Bank has no influence over their behaviour.

One final thought.

Much of the boom in the London market is being driven by buy-to-let purchases - as Huw van Steenis of Morgan Stanley has pointed out.

Yesterday I spoke to Lord Turner, former chairman of the defunct Financial Services Authority. He thinks there is a case for special measures by the Bank of England to take the steam out of buy-to-let.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 63.

    Many more energy efficient houses need to be built on pre used or low grade land. Our prime agricultural land must be protected. This huge population must eat !! We destroy our greatest asset at our peril.

  • rate this
    +1

    Comment number 62.

    BTL
    a ponzi scheme which the government and BOE has no intention of allowing to fail.

    Why aren't we building more affordable housing?

  • rate this
    0

    Comment number 61.

    The averagely priced house, since about 1952, through to recently, has been bought for a median of no more than 3.5x individual average salary, with an average mortgage rate of 7% interest, and an average downpayment of 10%.
    Thats been the definition of affordability for half a century.
    Yet the average wage earner, today, £26k, buys the averagely priced house, at £250k, they're paying 10x salary.

  • rate this
    -1

    Comment number 60.

    Justin 57

    What I mean is, if the monthly repayment on a 500k BTL loan is X then the rental on a 500k property should (other things being equal) be materially less than X. If it isn't that's a sign of something interesting.

    Inkling 55

    Yes, although it shouldn't be possible it is sometimes possible. Most times however, when schemes advertise such a return, there's a killer catch.

  • rate this
    0

    Comment number 59.

    In the 1960's, 1970's, 1980's and 1990's, the individual average wage earner was able to afford the averagely priced house, for 2.5x - 3.5x individual salary.
    Yet the average wage earner today, on £26k, who goes out to buy the averagely priced house, which now costs £250k, will be paying 10x his/her salary.
    And the cost of living is much higher today as well.


  • rate this
    0

    Comment number 58.

    @45.Up2snuff

    There may be no SD on overseas business purchase but agent still gets%, solicitors charge

    ---

    I thought that they had introduced 15% tax on purchases made by companies.
    Overseas individuals still have to pay stamp duty.

    I think. Perhaps. Please correct if wrong.

  • rate this
    +1

    Comment number 57.

    #50 Sorry but economically that is simply not true.

    For a mortgage a lender must take a view over 25 years on all your income.

    For a rent, a landlord is taking a view over 6-12 months only on your ability to pay.

  • rate this
    0

    Comment number 56.

    How independent is the bank of England? The question isn't if they can, is if they will.

  • rate this
    +1

    Comment number 55.

    @50sagamix

    Has been possible as some operators have built up significant BTL property, although I suspect that it is on the back of a rising property market at the time. BTL also operators seek auction repos, heavily discounted

    @53Up2

    fig 10yrs old good old days, ave fig, ave house sale & buy, new fittings, furnishings, white goods, brown goods mainly, sometimes cash out for/towards car/holiday

  • rate this
    -1

    Comment number 54.

    The FIRST thing the BoE MUST do is to stop giving FREE MONEY to the commercial/private Banks (and then to recover all the boundless largess the private banks have been given over the last 5 years.)

  • rate this
    0

    Comment number 53.

    @52 Inkling

    Still helpful info tho, Ta. Do you know what it was as % of avge. purchase price back then?

  • rate this
    0

    Comment number 52.

    45 Up2snuff

    Figure is out of date but as rough rule of thumb a house sale & onward purchase used to put est 8K into the economy above the direct costs of the purchase eg solicitors costs and stamp duty etc

    Objective of the banks and HMG appears to be to keep economy debt saturated and houses overvalued

    Housing continues to dominate the UK economy & therefore our international competitiveness

  • rate this
    0

    Comment number 51.

    They could of course :-

    1.Add 2% interest on mortgages over say 250000
    2.Build more houses - especially in SE/M4 (see point 3)
    3.Tax NIMBY's via council tax
    4.Halt immigration so its balances - out against in
    5. Tax people moving(down sizing) from Houses in SE to "up north" as profit. Tax only to be used for more new houses.
    6. Encourage employers via subsidies to cheaper housing areas.

    Or Nowt

  • rate this
    0

    Comment number 50.

    @ 44

    If the market is working as it should, the rent (on average and on the whole) will be significantly less than the 100% mortgage payment on an equivalent property.

    Thus not possible to fully fund a 100% BTL loan out of rental income. Unlikely to even come close to doing so.

    If it IS possible it's a sign that there's something wrong.

  • rate this
    0

    Comment number 49.

    @37 Inkling
    You rightly identify a cause of problem.

    Is answer to have in H o Commons more economists, accountants & retail bankers? IIRC, HoC population is heavily weighted to law, media, merchant banking, Unions & business incl. property! Ho Lords, IIRC, is similar.

    Should HoLords be reconstituted with public serving on Jury Service style basis?

    Would that achive more balanced representation.

  • rate this
    0

    Comment number 48.

    Lot of rubbish talked here:

    1. There is no bubble. There is overheating at ei London especially the superprime caused they to much dodgy foreign loot but we are talking about £10M houses - hardly every day stuff.

    2. In huge swathes of the provinces you cant give them away. I work in a middle class area where you can still get a 1 bed flat for £50,000 or a 2 bed for £80,000

  • rate this
    0

    Comment number 47.

    It’s not just London; asking prices are up in many other areas fuelled by speculation, sellers are unwilling to negotiate because HOUSE PRICES ARE GOING UP, result stagnation

    The problem is wages remain static so the only way to borrow higher multiples!

    If interest rate rise is not the way then lending multiple caps are the only fair solution, prices will have to adjust to real area incomes?

  • rate this
    0

    Comment number 46.

    Will there be affordability tests on rental agreements as well as mortgages? I think not.

  • rate this
    0

    Comment number 45.

    @37 inkling
    Absolutely right. Look at the numbers on Stamp Duty alone but then think what else happens.

    There may be no SD on overseas business purchase but agent still gets%, solicitors charge, then clearance, building, decorating & furnishing companies roll in for work. Then, property may be let again, so more agency fees.

    It's quite an industry.

    But ... it's bust us 3 or 4 times in 45 yrs!

  • rate this
    0

    Comment number 44.

    #30 Rents should not allow BTL investors to take out a mortgage, rent the house out, and soon end up with a house for free.

    What a marvellous idea. Whilst we are at it why not also ban businesses borrowing money to buy plant and machinery because it allows them to end up, once the loan is paid for, with the kit for free.

    That should be good for the UK economy.

 

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