The Bank of England moved to head off the risk of a housing bubble in Britain on Thursday, making a surprise announcement that it would put the brakes on a scheme launched last year to help boost mortgage lending.
The central bank said the Funding for Lending Scheme (FLS) would cease to offer banks incentives for mortgage lending and instead be refocused on helping small firms to borrow.
Britain’s economy and its housing market have staged an unexpectedly strong turnaround since the scheme was launched by the bank and British finance ministry in July last year in an effort to spur the long-delayed recovery by unblocking credit markets.
“Given the access to credit for households now ... it would no longer be appropriate or necessary for us to have our foot on the accelerator. It’s better to shift into neutral,” bank Governor Mark Carney said.
British house prices have risen by almost 7 percent over the past 12 months — their fastest growth in more than three years — sparking concern about the risk of a future bubble as well as rising living costs at a time of stagnant wages.
London prices have surged even more, partly on the back of foreign demand, and British Chancellor of the Exchequer George Osborne is widely expected to introduce a capital gains tax on foreign-owned property in a half-yearly budget update next week.
“We did not see an immediate threat coming from the housing market, but we are concerned about the prospective evolution of the housing market,” Carney said, adding that the Bank of England could take further steps to rein in house prices if needed.
Osborne, who has made a revival of Britain’s housing market a key part of his economic plans, endorsed the decision.
Sterling hit a 14-month high as currency traders bet the news moved the Bank of England closer to raising interest rates from a record low of 0.5 percent, where they have been since 2009.
Economists disagreed, saying tighter regulation could reduce the need for the bank to raise rates to tame house prices.
“By taking such action it can actually limit the need for direct monetary policy tightening,” ING economist James Knightley said.
House-building firms at one point lost more than ￡1 billion (US$1.63 billion) in market value as their shares — which have more than doubled in two years, helped by efforts to kick-start the property market — fell heavily on the news.
Carney said he did not expect a big economic impact because market funding conditions had improved over the past year and banks were already making limited use of the FLS.
“Although the changes to the FLS may be a surprise, they are not a shock,” said Paul Smee, who heads the Council of Mortgage Lenders, an industry group. “Lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust.”
Banking analysts at Bernstein Research warned that over the longer run the change could push up mortgage rates, as the FLS had boosted competition in Britain’s mortgage market.