Carney cool on house prices action

Tuesday 15 July 2014

Bank of England governor Mark Carney has said there is no need to reverse the rise in house prices as he told MPs that officials were not currently considering further measures to cool the market.

Mr Carney was being questioned by the Treasury Select Committee after the Bank's Financial Policy Committee (FPC) last month announced plans to curb riskier mortgage lending. His remarks came as latest official figures showed house prices in London rising at a record annual rate of 20.1% while they were up 10.5% across the UK.

Mr Carney reiterated his belief that "issues associated with housing" posed "the biggest risk over the medium term to the durability of the expansion" in the economy. But the governor said the FPC's measures - which include a new cap on high loan-to-income value (LTI) loans and stronger affordability "stress tests" for borrowers - were an "insurance policy" rather than an attempt to reverse increases.

Mr Carney told MPs: "The reason we took out insurance as opposed to trying to reverse activity is because we are in a low interest environment for where a high ratio mortgage could be appropriate." He pointed to the example of first-time buyers who were starting out in their careers and had prospects of higher earnings over time.

The new FPC rules mean loans of 4.5 times a borrower's income or higher should account for no more than 15% of new mortgages issued by lenders. Latest figures show this proportion currently stands at less than this, at 9%, indicating an attempt to prevent overheating should this rise rather than at present.

Mr Carney said that there were "a few institutions that are effectively at the cap". But he suggested that this could have the effect of encouraging banks and building societies to issue more mortgages in parts of the country where the market was more subdued, to allow them to make new high LTI home loans in London and the South East.

Mr Carney said the Bank's measures were not targeting a reduction in house prices. But it was concerned at the possibility of lending becoming "reckless" and household finances becoming overstretched in order to afford mortgages, causing indebtedness to grow and possible harm to the wider economy.

He said: "History shows that the British people pay their mortgages but what happens if they are borrowing in high multiples is that they have to economise on everything else in order to pay their mortgages."

The governor said the Bank was not "currently contemplating any additional measures" to cool the housing market. But he indicated there was further action it could take should it become necessary such as restrictions on loan-to-value (LTV) borrowing ratios and forcing lenders to hold more capital against mortgages.

Martin Taylor, an external member of the FPC, said: "Average house prices have been rising faster than wages for a very long time. It is not sustainable ultimately but it could go on for a very long time."

Mr Taylor said the FPC's affordability test was an attempt to "restrict the wilder shores of the mortgage market".