The governor of the Bank of England yesterday warned that the economy was at risk from a property bubble driven by cheap mortgages as he took action to curb lending.
Mark Carney issued the warning as he attempted to put the brakes on the surging property market by scrapping a flagship initiative that encourages mortgage lending.
Mr Carney said the Funding for Lending scheme (FLS) stimulus was no longer needed amid rising house prices, and the focus would turn instead to helping small business borrowing, which remains muted.
Mr Carney raised the spectre of a future property bubble where households over-stretch themselves to be able to buy homes, and said the Bank was taking measured steps now to try to avoid more drastic action in the future. He announced a series of measures to calm the mortgage market, including imposing tougher tests on customers before they are granted home loans.
Mr Carney said: “The changes announced today refocus the FLS where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”
The announcement came as the Bank’s Financial Policy Committee (FPC) published its latest twice-yearly Financial Stability Report, assessing potential “vulnerabilities” including those that might be posed by an overheating housing market.
It brings to a close a period when the market has been spurred on by the FLS incentives – giving lenders access to cheap finance in return for providing household loans – and the Treasury’s Help to Buy scheme.
Housing market experts said it could spell the “beginning of the end” for rock-bottom mortgage rates.
The FPC’s report noted that while the market was picking up from a low level, house price inflation was already “above historical average” on some measures. Surveys had shown an increase of 6.8 per cent in the year to October.
Rising house prices would see an increase in household debt as first-time buyers take on larger mortgages, the report said. A hike in interest rates would threaten “vulnerable borrowers”, especially if the economy and wage increases remain subdued.
Carl Astorri, senior economic adviser to the EY Item Club, said the report “hints at the FPC becoming increasingly wary of the potential for a housing bubble developing in the UK”.
Mr Carney highlighted the potential dangers of households where “they stretch and they stretch and they stretch” to try to afford a home.
He said that while the Bank did not see an immediate threat, the “concern is where this could go”, adding that the changes would “help keep the housing market on a sustainable path”.
Mr Carney said: “By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later.”
But he added: “We are prepared to take larger measures later if that becomes necessary.”