BANKS must be put under more pressure not to “throw petrol on the fire” of the house price boom by lending people mortgages worth up to five times their salaries, Vince Cable said.
The Business Secretary said he had been “appalled” to discover the size of loans being agreed by some lenders and urged the Bank of England to use its powers to intervene.
Mr Cable renewed his stark warnings about the threat to the wider economy posed by soaring house prices in London and the south east amid reports Chancellor George Osborne will tackle the issue in his annual Mansion House speech later.
Asked whether there should be a strict cap, the Liberal Democrat cabinet minister told BBC Radio 4’s Today: “It is crucially important that the banks don’t throw petrol on the fire.
“Most of us who have been through various housing booms in the past have recognised that a kind of stable level is three or three-and-a-half times
“I was appalled when I discovered that banks were lending five times.
“They have already reined it back on advice from the Bank of England but this is the key area that the Bank of England has got to operate in to make sure that this boom in house prices, particularly in the south of England, doesn’t destabilise the whole of the economy.
“The Bank of England gives guidance, hopefully steering the banks into making sure that the money goes into supporting small and medium-sized companies and getting long-term growth going rather than in fuelling house prices.
“That is the role of the Bank of England. They now do it in subtle ways but it is clearly their responsibility.”
Some banks have already moved to restrict lending - with Lloyds and RBS declining mortgages of more than £500,000 where that is more than four times earnings.
Mr Cable accepted that tighter restrictions would mean many in London could not afford to buy but said the interests of the country as a whole had to be addressed.
“The desires of individuals have to be balanced against the stability of the economy as a whole,” he said.
“I don’t want anyone to suffer but we have to make sure that the boom that is currently taking place in prices does not get out of control.”