Bank of England granted enhanced legal powers to rein in the overheated housing market

The Bank of England has had its specification for greater legislative powers within the mortgage market approved by the Chancellor of the Exchequer, George Osborne.

The Financial Policy Committee (FPC), which is the Bankís designated body for the maintenance of financial stability, will kerb the loan-value ratio of mortgages taken out henceforth and will also regulate the exponentially increasing amounts of debt taken on by buy-let agencies as part of a series of measures undertaken to prevent the synthesis of a housing bubble.

Having stated his proclivity for the Bank to take on more power in his speech at Mansion House earlier this year, Osborne will now entrust the FPC, created under the Coalition regime, with fresh legal powers as he seeks to eradicate the threat of an overheated housing market. The chancellor will hope that this move will aid the prevention of recurring boom-bust phases within the housing market, a situation thatís gravity is underlined when light is cast on the two thirds of national banking disasters which came after property boom-bust phases.

The FPC seeks to regulate the size of loan based on a prospective borrowerís financial stability ñ that is their income, assets and monthly outlay. Going further still, the FPC will exercise its power over the buy-let market. Significantly, the Bank of England will be able to force lenders to fall in line with their demands, when previously they merely held an advisory position, albeit an influential one nonetheless.

The Bank of England had no words of warning for the long term prospects of the help to buy scheme, in welcome news for low-income families, lenders and the Coalition, conveying their belief that fees raked in by lenders in their provision of help to buy mortgages are warranted. This is welcome news for the Coalition, as questioning of their main housing policy couldíve had far-reaching political consequences negatively impacting on their election campaign.

The chancellor took this opportunity to reinforce the benefits of the Coalitionís flagship housing scheme, stating: ìI was pleased to see the committeeís conclusions that the scheme does not pose material risks to financial stability in the UK and has not been a material driver of recent house price growth.î

The Council of Mortgage Lenders (CML) reinforced the BoEís perspective on Help to Buy. Its director, Paul Smee said: ìIt is reaching its intended target, but not stoking disproportionate levels of activity in low-deposit lending nor acting as any significant influence on house prices.î

Measures taken earlier in the year, namely the recommendation that lenders restrict their lending to below 4.5 times a borrowerís income, have already yielded a dampening effect within the housing market. Nationwideís latest housing data revealed house prices dropped for the first time in a year and half across the UK, and ONS statistics shows that monthly mortgage approvals have decreased since the start of 2014. However, the disparity between London and regional house price growth is becoming increasingly stark, and the overinflated property market within the capital remains the greatest challenge, vis-‡-vis housing policy, facing policymakers.

But equipped with a fresh arsenal of powers, the expectation is high for the Bank to rein in the housing market and not be afraid to take an uncompromising stance towards reckless lending.

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