Bank of England could use new powers to stem the rise in house prices
The Bank of England could be poised to increase the cost to banks when they make new home loans to their customers. It is reported recently that the Bank of England’s Financial Policy Committee (FPC) could increase the capital requirements on residential mortgages to dampen property market price increases emerging in London and the South East.
The FPC was created by the Coalition Government as part of its reform of British financial regulation. The 10-strong committee is chaired by Mark Carney, the Governor of the Bank of England, and its members are drawn from across the Bank and the UK’s two financial regulators, as well as former senior financiers, including Martin Taylor, a former chief executive of Barclays.
In a report sent out to clients, analysts at Deutsche Bank said that the FPC could use new powers to raise the minimum deposit on house loans from 15% of their value to 20% in the face of house price inflation concerns.
The use of the power would mark the first time the Bank of England has directly intervened to slow down the growth of mortgage debt in the banking sector and would be seen as a way of avoiding a more painful rise in interest rates. As this would place a burden on the house buyer to find a larger deposit, it is hoped that the move could put a brake on things. However, in the UK the use of such a tool to limit mortgages could prove controversial and regulators have warned in recent years about the public anger that could be caused by their use.
In December, house prices staged their largest monthly rise in four years as the cost of the average home rose by 1.4%, the greatest increase since August 2009. Year-on-year, property has risen by 8.4%, according to figures from the Nationwide, which warned that “affordability may become stretched” if prices continued to rise at the current rate.
“We think the impetus here will be as much to take some heat out of the London and South East housing market as to show action in the face of a rapidly recovering domestic economy which can’t really afford higher interest rates,” said Deutsche Bank
According to Deutsche Bank, if the FPC were to vote for an increase in the capital requirements on UK mortgages, it could cost Lloyds Banking Group, Britain’s largest provider of home loans, about £1bn in extra capital and a further £1.45bn for the country’s other major banks.