Bank of England governor says mortgages could be capped to control house prices
By Michael Hennigan, Finfacts founder and editor
May 19, 2014 - 6:09 AM

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Mark Carney, Bank of England governor, speaking on Sky News, May 18, 2014

With the UK unemployment rate down to 6.8%, the Bank of England is eager to keep the base rate unchanged at 0.5% -- the lowest since the central bank was founded in 1694 -- until the current economic recovery becomes sustainable.

Mark Carney, the governor, on Sunday said people could be stopped taking out mortgages worth many times their salary to buy new homes.

He said in a television interview that capping the size of mortgage ratios to salaries was one measure the central bank was considering to control the housing market.

The governor also said the Bank is looking at proposing an "affordability test" to George Osborne, the chancellor, in respect of the 'Help to Buy' scheme which underwrites mortgage borrowing above 80% of the property’s value, enabling people to take out mortgages with a deposit of as little as 5%.

Last week in Ireland, Michael Noonan, finance minister, confirmed that the Government is considering a new State bank guarantee that would enable first time house buyers to get mortgages with an LTV (loan-to-value) of up to 95%.

The UK has been building insufficient housing units for decades because of the power of Nimbies (Not in my backyard syndrome) in protecting what are called "greenbelt" areas.

In an interview on the Sky News Murnaghan show, Carney warned that rising house prices represented the biggest current risk to the economy.

He said that the number of large mortgages being approved to house buyers was on the rise and that the UK was in need of new house building. He added: "The issue around the housing market in the UK … is there are not sufficient (numbers of) houses (being) built."

Asked if more houses need to be built, he replied: "That would help us out. We're not going to build a single house at the Bank of England. We can't influence that," and comparing the situation to his home country of Canada he added: “There are half as many people in Canada as in the UK, [yet] twice as many houses are built every year in Canada as in the UK, which just gives you a sense of the orders of magnitude of the supply problems.” 

"What we can influence… is whether the banks are strong enough. Do they have enough capital against risk in the housing market?"

In an separate interview for Murnaghan, David Cameron, prime minister, admitted the Government needed to build more houses and said the governor was "absolutely right" -- an old political ploy.

However, he added: "The building of houses is going up. If you talk to any housing developer at the moment or builder they will tell you that the help to buy scheme the government has put in place has been hugely helpful in bringing forward more development or house building.

"We are training apprentices in the building trade to make sure that we can deliver on these houses but we do need more, yes."

Prices are currently rising at more than 10% a year across the country. Analysis by Sky News has shown the number of £1m properties has doubled since 2008.

The Organisation for Economic Co-operation and Development (OECD) said earlier in May that the UK's housing market, buoyed by record low interest rates and several government-backed subsidies for home buyers, was in danger of over-heating without further action by ministers and regulators.

Sir John Cunliffe, the Bank deputy governor, said in a speech {pdf] on May 1 that the prospect of another boom and bust in the housing market could be likened to "a movie that has been seen more than once in the UK."

Housing starts, insufficient to meet demand before the crisis, dropped from around 230,000 to an average of a little over 120,000 between 2008-12. They have begun to recover - - indeed, dwellings investment has been a major part of the recovery in economic growth over the past 12 months. But the increase in housing starts seen over the past few years has lagged behind growth in transactions.

The history of our housing market for the last 25 years is one in which the supply of housing in the place and of the type that people want has not kept up with demand. In 2004, Kate Barker - - a former MPC (Monetary Policy Committee) member - - concluded in her extensive report on the housing market that, if we wanted to reduce the trend in annual real house price growth to 1%, we needed to build an additional 120,000 private sector homes annually in England, an increase of almost 100% relative to the 2002-3 level. In the end, and despite a credit boom, the increase in annual housing completions up to the crisis was only 25%.

There are many reasons for the failure of the supply of housing to keep up with demand in the UK which go well beyond the remit of a central bank. But the effect is that when demand grows strongly house prices can keep rising quickly for a long time. This is a movie that has been seen more than once in the UK. "

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