Bank of England financial stability policymakers are expected to rein in a surging housing market by introducing macroprudential tools in order to curb excessive debt looming over households.
A lack of new housing supply and an upbeat consumer mood among British households have been sending house prices above their pre-crisis levels since the start of this year.
In its quarterly Financial Stability Report due on Thursday, the Bank of England's (BoE) Financial Policy Committee (FPC) is expected to announce macroprudential tools, such as a cap on the level of higher loan-to-income mortgages, in order to moderate an excessive debt being piled-up on households due to surging house prices.
The possibility that the central bank could introduce some sharp macroprudential regulations on the UK housing market could also generate a likely downward pressure on sterling, which has been sliding off the five-year peaks following the BoE Governor Mark Carney returning to his dovish mood on Wednesday this week before the Treasury Select Committee.
FPC's Second Act
The FPC policymakers have already introduced the first of its significant macroprudential actions to tame the UK's robust housing market. It was at its first official meeting in November last year, when the FPC suspended the credit-easing Funding for Lending Scheme (FLS) for house purchases. This time, economists expect introduction of certain direct limits on measures such as loan-to-value and loan-to-income ratios.
"The FPC could impose direct limits on measures such as loan-to-value and loan-to-income ratios. It could also impose higher capital requirements for riskier mortgages, making it more expensive for banks to lend for house purchases," Standard Chartered analysts wrote today in a note to markets.
Some commentators have also raised the option of monetary action, such as a rate rise, to rein in soaring house prices. This was explicitly turn down by Governor Carney during the May Inflation Report press conference when he said that "monetary policy wouldn't be the right tool," adding that "the FPC could employ a range of tools … to provide insurance against the build-up of bigger risks in the housing market."
Mortgage approvals sliding off early 2014 peaks
Despite the level and volume of mortgages sliding off the peaks seen at the start of this year, the amount of loans approved for home purchases is significantly higher compared with last year, but remains below pre-crisis peaks.
According to the BoE's latest credit report, the value of secured loans approved for house purchases reached £44 billion between January and April this year, which is up from £32 billion approved during the same period last year.
The number of mortgages has been falling in the last three months but the house prices keep surging on the back of a weak supply of new housing and an increased consumer appetite boosted by stronger than expected economic recovery.
Rising house prices show first signs of moderation
The latest available official data showed prices of properties had risen 10% over the year to April and rose in all parts of the UK with the biggest gains recorded in London, where prices increased nearly 20%. The steep price surge in London thus pushed the total house price index in the UK to 6.5% above the pre-crisis peak seen in the first quarter of 2008.
But the first commercial insight into the price movement in June suggested property prices moved slightly off the peak records seen at the start of this year, as the balance between demand and supply improved.
According to leading property portal Rightmove, new seller asking prices rose by just 0.1% in June. Surprisingly, the price index dropped 0.5% in London, reflecting a combination of buyers' reluctance and a surge of over 20% more sellers rushing to market this month.
Rightmove's Miles Shipside said that apart from the new Mortgage Market Review, which appears to show a slowdown in mortgages, London prices are "marking time ... It’s an example to the rest of the country of what happens when affordability and common sense get stretched too far."
In its June Monetary Policy Committee minutes, the BoE policymakers argued that one of the possibilities for a weaker activity on housing market could reflect some potential homebuyers becoming reluctant to purchase, viewing current house prices as too expensive.
Still, Carney has so far several times argued that the UK housing market poses the biggest threat to sustainable growth. "We don't want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term," Carney said in an interview on May 19.
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