The Bank of England has asked formally for new powers to prevent a possible future housing boom and bust. Under the powers requested, the bank would be able to limit, according to their financial circumstances, how much purchasers can borrow to buy a home.
In the summer the Bank of England’s Financial Policy Committee (FPC) ‘recommended’ that banks and building societies restrict providing loans greater than 4.5 times the borrower’s income. The FPC did also note that high loan-to-value lending now accounts for only 9 per cent of mortgages, compared to 25 per cent during the 2007 property price boom.
This did not stop the bank wanting new powers to cover both residential and buy-to-let mortgages.
With buy-to-let mortgages the Bank wants to make sure that the income to be received is greater than the interest payments on the landlord’s mortgage. The bank believes implementing controls on professional investors could, by preventing landlords speculating on hefty rises in house prices, cool the housing market.
In June the Chancellor promised that, in order to avoid future property price bubbles, the bank’s powers to ‘recommend’ would be ‘beefed up’.
The stronger powers are expected to be in place before June 2015.
Despite the call for additional powers the Bank has recognised that the Help to Buy initiative is not a threat to the country’s financial stability.
In a letter to the Chancellor, Mark Carney, the bank’s governor, cleared the scheme. He stated that the FPC had found that the Help to Buy scheme only accounted for five per cent of total mortgages and that the mortgage guarantee was not responsible for rising house prices. The FPC had, therefore, decided not to change any terms. His letter explained:
“There has been strong house price growth in some regions but, in the committee’s judgement, the scheme does not appear to have been a material driver of that growth – for example, take-up of the scheme has been weak in London where house price growth has been strongest.
“Under current market conditions, the committee assesses that the scheme does not pose material risks to financial stability.”