The Bank of England have announced their intention to implement a series of measures, including a mortgage cap on the amount that can be loaned at high multiples of income, in order to bring order and stability to the rapidly booming property market.
Under the new regulations, mortgage providers will be unable to lend any more than 15% of residential mortgages at more than 4.5% the applicantís annual salary.
Affordability checks on applicants are also set to be tightened, as the bank continues its endeavour to prevent individuals acquiring irresponsible levels of debt and putting themselves at long-term financial risk, with interest rate rises seemingly imminent.
The plan was unveiled by the Bank following worrying remarks from governor Mark Carney about the damaging consequences that a housing bubble could have on the countryís economic recovery and long term prospects.
In particular, London and the South East have been identified as the most problematic areas within the UK at present, with the Office for National Statistics reporting that properties in the capital rose in value by an average of 18.7% between April 2013 and April 2014.
Furthermore, a recent study by Shelter revealed that across all 32 of Londonís boroughs, less than 10% of properties are in financial reach of families with children, compounding the notion that the housing market in these areas of spiralling out of control and need to be regulated in order to prevent a future ëbubbleí occurring and a generation being unable to become homeowners.
The new policies were devised by the Bankís Financial Policy Committee (FPC), which are tasked with identifying potential threats to the countryís economic stability and formulating measures in order to remedy these problems and uphold long term stability in the property market.
Their primary reforms include:
Guaranteeing that all secured loan providers in the country comprehensively evaluate whether a mortgage applicants annual income can afford monthly payments at an interest rate three percentage points higher than they are now- a moderately stricter affordability check than at present.
Minimising the risk of lending to individuals who desire larger mortgages, through the implementation of a 15% cap on the quantity of secured loans the banks and building societies can distribute to individuals who desire to borrow over 4.5 times their annual salary.
A promise from the Treasury to change the Help to Buy scheme so that no individual using the initiative can borrow more than 4.5 times their annual income.
Long term protection
The Bank identified that the new policies will most likely fail to have an immediate impact on the property market, and downplayed fears that they will suddenly damage a prospective homeownerís ability to acquire their desired property.
Governor Mark Carney urged consumers to view the plan as a precautionary measure which will seek to minimise the long term risk within the market by making the necessary changes to ensure lenders act responsibly.
“These actions will have a minimal impact in the future if, and it is an important if, if the housing market evolves in line with the bank’s central view,” Mr Carney added.
“The 15% cap… could quickly become relevant if house prices grow more than we expect, if incomes grow less rapidly than we expect, or if underwriting standards slip.”
Mr Carney argued that the Bankís policy has always been to act in a reactionary and calculated manner, but act quickly as well, in order to place a ìfire breakî on more risky lending.
The Council of Mortgage Lenders- which comprises almost 95% of the UKís lenders- have optimistically forecasted that the new cap will primarily affect the London property market.
“Nationally, 9% of new loans are at 4.5 times income or more, but the figure is 19% in London,” said Paul Smee, director general of the Council of Mortgage Lenders.
However, Carney highlighted that the 15% cap could be applicable nationwide in the next 12 months.
Certain lenders, the most prominent being the Lloyds Banking Group and RBS, have already restricted the amount they can lend to a secured applicant to four times their income for mortgages totalling over £500,000. It is estimated that the average mortgage size for a home purchase is now £135,200, which perhaps signifies the success of the collaborative effort between the Bank and the countryís lenders collectively to minimise the long term financial risk of consumers- particularly when you take into consideration that the latest ONS estimated the average property in the UK to be £260,000, and £485,000 in London.
Both Lloyds and RBS have consistently reiterated that their new lending policy is targeting at reducing the ìinflationaryî pressures in the London property market at present.
Recent figures released by the ONS illustrated that the average house in the capital rose by 18.7% in value over the past year, where a low percentage of purchasers typically pay in cash, preferring to utilise capital in order to cope with the higher financial demands of buying housing in London.
However, Baroness Jo Valentine, chief executive of London First, a major representative of a number of housing firms, has sought to downplay the impact the new measures will have on constraining the London property market, arguing that anyone who believes it will do so is sadly ëmistakení.
Ms Valentine said: “If anyone thinks these tighter rules on mortgage lending will somehow make London prices more reasonable then they are mistaken.”
ìIt is highly unlikely that these [new measures] have any significant impact on the health of the housing market in any part of the UK, including the booming markets in London and the South Eastî
However, a number of surveys have contradicted this notion and have conversely suggested that the London property market may be cooling down. In particular, figures indicating that mortgage approvals- a sign of future sales- have fallen in the past few months, seem to highlight that the tougher affordability checks are beginning to have the desired affect they were formulated for.
Furthermore, it seems natural that property prices will begin to stabilise as a consequence of tougher lending regulations because demand will be organically reduced. Logically, this will prevent those without a sufficient level of income to acquire a home and take to the private rent sector in the country until that time that they have the money to do so.
Whilst this might result in a number of young workers being unable to attain ownership of a property in the near future, it should provide ample time for house builders to raise supply levels so that they match demand, so that property prices naturally stabilise.
In the meantime, the government should consider the implementation of a mass house building programme in the country in order to raise supply, and should evaluate their current stamp duty policy and consider whether it should be lowered so that those who are forced to take to the private rent sector now to meet their housing needs, are given a solid platform to enter onto the property ladder when they are financially able to do so.
Mortgage Market Review
Banks and building societies are already utilising the new affordability checks- more commonly referred to as the Mortgage Market Review- in order to check if a mortgage applicant can afford higher payments when interest rates rise in the future.
And the Bank of England has announced that they will add to this measure by necessitating that lenders ëstress checkí mortgage applicants against interest rates three percentage points more than they are at present.
However, mortgage brokers have criticised this modification, arguing that it have a minimal impact on the borrowers across the UK.
Governor Carney stressed that whilst the current state of the housing market in the UK is not an immediate threat to countryís economic recovery, that a small change in the conduct of lenders could nevertheless have a large affect on the long term stability of nation.
Following the announcement by the Bank of the new measures, the government revealed that they would implement their own cap on the amount a borrower can take out through their flagship Help to Buy scheme, so that they can take out no more than 4.5 times their annual income.