Mortgage caps: the answer to the housing bubble?
Rather than raising interest rates, the Bank of England suggests capping the size of mortgages to deal with the housing bubble. And one giant lender has already done just that.
Mark Carney, Governor of the Bank of England, believes the UK housing market has "deep, deep" problems. In fact, Carney is so worried about growing stresses within the British property market that the Bank may introduce yet more rules to curb mortgage lending.
One of Governor Carney's biggest concerns is that heightened demand for property is being aggravated by a lack of new homes being built. Last year, only 123,000 new homes were constructed in the UK, but over 200,000 a year are needed to cope with new households being formed. In an interview with Sky News on Sunday, Carney described this lack of new homes as the biggest structural problem within the UK housing market.
What's more Carney is worried that, buoyed by record-low interest rates and the Government's Help to Buy scheme, British borrowers may be lured into over-borrowing by taking on too much debt to buy homes.
That's why he says the Bank is considering introducing new curbs on mortgage lending in order to pour cold water on an over-heating housing market.
Mortgage caps, not higher interest rates
During previous economic boom-times, the Bank of England has tackled rapidly rising inflation by raising interest rates. However, the fear is that raising Base Rate at the moment could damage Britain's still-fragile economic recovery.
Instead, Carney has suggested ways to make mortgages more difficult to get. These new curbs may include introducing a cap on the income multiples lenders can use when considering mortgage applications. The Governor went on to warn that such a cap could take effect as early as next month, should the Bank see the need to act swiftly.
Carney said: "The level of higher loan-to-income mortgages, ones above four-and-a-half, five times loan-to-income, potentially could store up bigger problems for the future and we need to be careful."
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Getting a mortgage has already got tougher
Although Governor Carney's remarks were greeted with alarm by various lenders and borrowers, the truth is they are unlikely to have any direct impact on the housing market and mortgage demand. Far more important are new regulations which were introduced last month, aimed at reducing risks for lenders and borrowers alike.
On 26th April, the Financial Conduct Authority (FCA) introduced its Mortgage Market Review: a whole new raft of rules that make getting a mortgage much tougher. Under this stringent set of regulations to prevent risky lending, the new application process for a mortgage will be far longer and much more intrusive.
Now people seeking mortgages must provide would-be lenders with in-depth details of their income and spending habits, right down to the last penny. And these figures must be backed up by proper paperwork - no documentary evidence means no mortgage.
So with regulations already in force requiring mortgage lenders to undertake forensic analysis of borrowers before making mortgage offers, is there really any need for yet another layer of rules and regulations?
Opponents of further curbs to mortgage lending argue that, with slower, costlier (and pricier) mortgages already in place, there is no need for further restrictions on the availability of home loans. Another possibility is that the Government could end support for higher-risk homebuyers (those with small deposits) by withdrawing its Help to Buy scheme.
Governor Carney has already expressed caution on any more tinkering in the mortgage market, saying of high loan-to-income loans: "We need to be calibrated, we need to be proportionate, if we were to suggest some adjustments to the amount of these types of mortgages that banks should underwrite."
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Lloyds limits large loans
Despite concerns that further mortgage limits are not needed and would be heavy-handed, the UK's biggest mortgage lender has announced a radical change to its lending policy for high-value home loans.
With immediate effect, Lloyds Banking Group will apply a maximum income multiple of four when lending against homes valued at over £500,000. Lloyds describes this as a "targeted policy change primarily designed to address specific inflationary pressures in the London housing market". This new policy will be applied alongside the bank's usual affordability assessment.
Commenting on this new restriction on high-value home loans, Stephen Noakes, Group Director of Mortgages, pointed out that house prices in the capital are now almost 30% above the 2007 peak, which is having an impact on income multiples.
He continued:"We’re not seeing such issues across the rest of the UK and, therefore, this is a targeted response to an issue largely in the upper tiers of the London housing market. This prudent update to our lending policies is intended to manage risks to our business and for our customers."
Clearly, if the UK's number-one mortgage lender is worried about a bubble in London and in high-end properties, then other banks and building societies are likely to share similar concerns. So borrowers should brace themselves for other lenders to introduce similar limits in the coming weeks and months.
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What do you think? Should the Bank of England restrict the supply of mortgages to deflate the housing bubble, or should it hike interest rates?
More on property:
Mortgage Market Review: why finding a mortgage is set to get harder
Record mortgage complaints as borrowers struggle to make payments
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meldrewreborn, I don't really understand your first paragraph. LVT isn't supposed to suppress the inflation of the rebuild cost (which is tied to general inflation) but rather the inflation associated with value of the land (which is created by the community). LVT is effectively a rent paid by landowners to those that create the value of that land. Your next statement about the "LVT campaign" is uncited - I don't know of anyone nor any campaign which describes Land Value Tax as not being a tax. I have heard some people suggest that it should replace all forms of taxation, presumably because it is the "least bad tax" but I personally don't agree. And incidentally those that have suggested a total replacement seem to be right-wing, Tory-voting, small government, minimal taxation types. As for your next point I don't agree that LVT would be a way to get the rich to pay for government expenditure and I'm not aware of anyone in authority actually saying so. It's also not one of the aims of LVT. And finally I have already explained why the tax would be fair but obviously I haven't been clear enough. To recycle your flats example let's take a situation which exists in certain parts of London where homes are within very close proximity to public transport - the underground for example. In these cases easy access to stations is seen as highly advantageous and homes which are very close to them command a premium. With LVT we would proportionally tax that community created benefit based on the amount of land which receives it and not the number of people who benefit. This means that if only one person or family wants to benefit [I]to the exclusion of others[/I] then they would pay the full rate. But if the land is being used [B]more efficiently[/B] such as in the case of flats then that benefit is shared as is the tax. To me this seems both fair and equitable as well as succeeding the the LVT aim of ensuring that land is used in the most efficient manner possible.
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Take two properties next to one another, with the same land size. One has an internal floor size of 3 time the other. Tell me how LVT could stop the rise in house prices for each. The LVT campaign says its not really a tax and that it would replace all otherforms of taxation. You'll tell me you don't subscribe to that. the problem is the phrase mean different thing to different people, but all the proponents think its the answer to all problems. its promoted by the left leaning parties because they visualise that the poor would pay little and the rich would pay for the vast majority of government expenditure. Time to wake up - the rich already do pay for the vast majority of government expenditure. Trying to get money from land owners is thought to be easy, but in reality it would be just as bad as the problems we have now. And it wouldn't be fair - witness the flats example.
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meldrewreborn said: [B]"Land Value Taxation, because it would be applied to the land value alone and not what was on it, would in my view be irrelevant be irrelevant to house prices."[/B] I don't understand. The difference in price of a two bed house in a remote part of North Wales vs. the same construction in Chelsea, London is entirely attributable to location. The rebuild cost of both would be the same therefore the house in Chelsea has a location premium and by taxing this you would cool house prices in areas where they were getting out of control. [B]"Although a single flat in block of flats would expect to pay a much lower charge than a single house of a couple of houses on an adjacent site."[/B] That's correct because the residents of the flats are in effect [B]sharing[/B] the burden of the tax between them. [B]"I don't see an LVT party standing in the upcoming elections"[/B] That might be because they're European elections? Or are you referring to the handful of local elections where taxation powers of this sort don't exist? Or maybe the Scottish referendum where the SNP has it as one of their proposals? [B]" I've come across some crackpot ideas in these blogs but without a doubt LVT as a pancea for all ills is the most crackpot."[/B] I guess you don't really understand it then. It's in use in several places around the world and is regarded in that "crackpot" field of science - Economics I think it's called - as being "the least bad tax". http://en.wikipedia.org/wiki/Land_Value_Tax ^^^ seems to have recovered from the vandalism so you might want to take a look.
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26 May 2014