Published: 21 May 2014 | Author: Bob Pannell
- The Bank of England has signalled that macro-prudential measures to limit the housing market upturn are likely in the near future, and possibly in the very near future.
- This reflects a forward-looking judgement on the part of the Bank, designed to ensure that mortgage credit growth associated with the housing recovery of the next few years is sustainable.
- Forthcoming measures will, in our estimation, be careful, calibrated, and proportionate, and designed to reinforce prudent affordability checks, rather than to apply the brakes to the housing market in a more dramatic fashion.
The macro-economic picture has not changed very much over the past month.
Preliminary GDP figures for the first quarter confirm that economy activity has now more or less regained its Q1 2008 peak level. The UK experienced broad-based growth of 0.8% in the quarter. This compared with 0.7% growth in the final quarter of 2013, but was sufficient to underpin year-on-year growth of 3.1% - the strongest outturn for the UK since late 2007.
The latest labour market statistics show further strong gains in employment (helped by a strong contribution from self-employment), a further dip in the headline unemployment rate to 6.8% and unchanged earnings growth of 1.7%.
Meanwhile, the headline inflation rate rose in April, for the first time in ten months, to 1.8%.
The Bank of England’s projections for economic growth and consumer price inflation – as outlined in its May Inflation Report – differ only marginally from three months earlier.
The report took place against the background of mounting concerns about the strong recovery of the UK housing market. The governor Dr Mark Carney sought to counter market expectations of a need for early interest rate rises by signalling that monetary policy was the last line of defence against financial stability risk. He also emphasised that the UK is likely to see “gradual but limited” increases in interest rates.
Since then, the governor used an interview with Sky News to trail that macro-prudential action, to address housing market issues, is likely in the near future. Quite possibly, the Bank will announce measures, immediately following the next scheduled meeting of the Financial Policy Committee (FPC) on 17 June.
Housing and mortgage markets
The timing of Dr Carney's comments is interesting, given that the Bank had highlighted in its May Inflation Report that approvals for house purchase had been weaker than expected in the first quarter and were expected to be somewhat lower for the rest of 2014.
While there continues to be strong year-on-year growth in lending volumes, as our own lending figures show, gross mortgage lending dipped a little in March on a seasonally adjusted basis.
The implementation of the Mortgage Market Review (MMR) from late April has made it a little harder to interpret recent market data. As we have pointed out previously, there may be some disruption to the monthly pattern of activity while MMR procedures bed down.
Our forward estimate is that gross lending (not seasonally adjusted) recovered to £16.6 billion in April. This would be up 8% on March and 36% higher year-on-year.
The FPC has been monitoring housing developments closely, with a view to action, for several months.
It seems unlikely that specific short-term market developments have been the catalyst for Mark Carney to herald macro-prudential action. The governor has in fact been at pains to manage down expectations as to what the FPC, as regulator, can deliver, as well as making it clear that it is not in the business of targeting house price inflation.
A more plausible explanation is that these are the intended actions of a forward-looking committee, whose macro-prudential objective is to engineer a gentler trajectory for the housing market and the growth of household debt than might otherwise have occurred.
Successive comments by Mark Carney and other FPC members reinforce our conviction that interventions will be measured. Careful, calibrated, and proportionate comprise a mantra that resonates for us.
Another interesting aspect is that Carney’s timing follows so soon after the Mortgage Market Review regime has begun, and so soon after the Financial Conduct Authority gave the FPC the power to recommend adjustments to the interest rate stress tests applied by lenders as part of their mortgage underwriting assessment.
While the FPC has various levers that it can pull to rein back the housing market, a number of them - including its directive powers to influence capital requirements – are blunter instruments that do not seem appropriate to us, at this stage of the market's recovery.
Mark Carney’s interview with Sky News implied that the near-term priority for the Bank is to reinforce prudent affordability checks. At the press briefing for the Inflation Report a few days earlier, Mark Carney volunteered that "... the most notable development in terms of mortgage lending as a trend has been the increase in higher loan to income mortgages”.
This is illustrated in Chart 1, which shows the recent trends in the mortgage indicators that featured in last November's Financial Stability Report.
Chart 1: CML estimates of FPC core indicators
This has been a recurring theme for the FPC for some time, and it would therefore be surprising if it did not act in this area. While the FPC could recommend a direct cap on income multiples, it could achieve much the same impact indirectly by prescribing more narrowly the interest rate stress tests that lenders should use to underwrite affordability decisions.
The regulator might be more comfortable implementing a lender-facing measure of this sort, given that it has previously shied away from asking for a power to set LTV caps in the absence of a wider public debate. Another advantage, given the judgement-based nature of macro-prudential regulation, is that the FPC would be able to recalibrate the stress test several times in order to achieve its desired market outcome.
As the FPC has noted, in its Financial Stability Report and elsewhere, that borrowers may extend the term of their mortgage to improve their affordability position, it may also decide to address this aspect in June.
It almost goes without saying, that any FPC actions to reinforce affordability metrics is likely to be felt disproportionately by would-be first-time buyers.
Help to Buy
We do not see Help to Buy as an immediate priority for the FPC, not least because Mark Carney has recently described it as a targeted and relatively small programme. Government figures show that just under 20,000 properties had been bought under the (larger) equity loan scheme in the year to March.
As the Help to Buy schemes would potentially be affected indirectly by any general action on affordability metrics, the FPC may well prefer to wait until it has a formal responsibility to evaluate Help to Buy in September, and to make specific recommendations then about the scheme parameters.