TAKING the heat out of the housing market has been a topic of debate for so long it is easy to forget that it was in the doldrums for several years and going nowhere.
The pick up in activity, particularly in south-east England, has been so rapid that it caught many commentators by surprise. Finding solutions has been a conundrum for those who are damned if they do and damned if they don’t
The Bank of England finds itself in this position, knowing that it has the power to release pressure and stop the market overheating, but also conscious that whatever it does may have unintended consequences.
A rise in interest rates to cool demand would have an adverse impact on those areas outside the southern hotspot where prices are not rising at anything like the same rate. It would also have ramifications for the wider economic recovery.
Because there were no indications of any such move by the Bank’s financial policy committee (FPC) yesterday, the markets responded positively to the decision to cap the amount that housebuyers could borrow to 4.5 times their income, a ceiling that only a few borrowers breach.
One favoured option would have been to tough out the boom and allow the market to decide prices. There have been some signs of prices slowing and even declining as supply and demand come into greater equilibrium. Another argument in favour of doing nothing would have been to avoid spreading panic among homeowners about the value of their property falling.
However, the FPC has acted and the cap is in place. Lenders were generally supportive and Royal Bank of Scotland/NatWest confirmed that this month it introduced a four times loan-to-income cap and maximum term of 30 years for all mortgage loans of £500,000 or more. Self-policing of mortgage lending is crucial alongside the general rulebook in order to avoid the problems of the past, though RBS also admitted that 8.7 per cent of its loans so far this year have been above the 4.5 times ratio.
The use of a financial stability tool is a departure for the UK and a signal about how the Bank of England may respond in similar situations, including a possibility of it rationing some high loan-to-income mortgages. With impeccable timing in relation to events elsewhere, Andrew Tyrie, chairman of the Treasury select committee, stated: “The more the market were to overheat, the more this measure could bite.”
However, this attempt at dampening prices via controls on the supply of mortgages looks a little timid and on its own will not tackle the problem. Local authorities need to increase land supply to help stimulate construction and satisfy latent demand in many parts of the country. A greater flow of stock on to the market would ease pressure on prices, though it also needs to be done in a controlled way to avoid a collapse in property values.
Inquiry should help all sides in energy market
AN INQUIRY into the energy market was as inevitable as it was overdue. Customers want and deserve to know how the big companies supplying electricity and gas justify their pricing and to what extent competition works in favour of the customer or the utilities themselves.
It is something the companies have also demanded as it will give them a chance to put their case and go some way towards rebuilding trust.