June 26, 2014 by AGENCE FRANCE PRESSE
Britain acts to cool booming property
LONDON, June 26 – The Bank of England on Thursday launched measures aimed at cooling Britain’s booming housing market, including a cap on lending for home loans.
The bank’s Financial Policy Committee (FPC) recommended that property loans of 4.5 times a borrower’s income or higher should comprise no more than 15 percent of new mortgages, with effect from October.
The news pushed up sterling, since markets took it as a signal that the Bank of England might soon begin to tighten its key interest rates.
The FPC added in a key report that banks should apply a “stress test” to determine that borrowers can afford mortgage repayments, should the Bank of England’s main lending rate climb by 3.0 percentage points.
The BoE has held its key interest rate at a record low level of 0.50 percent since March 2009, as it sought to stimulate and strengthen Britain’s economic recovery. Its benchmark rate meanwhile influences what retail banks charge customers for home loans.
With Britain’s economy powering ahead in the first quarter with gross domestic product growth of 0.8 percent, there are stubborn concerns over its recovering housing market amid mounting fears of a bubble in London.
“The legacy of high indebtedness and structural imbalances mean that there are financial stability risks that if left unchecked could undermine the durability of that expansion,” BoE governor Mark Carney told journalists at a press conference.
“And the biggest risks relate to the housing market.”
The FPC added that “the recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan-to-income multiples”.
It added: “At high levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates.
“This could pose direct risks to the resilience of the UK banking system and indirect risks via its impact on economic stability.”
The regulator stressed that household indebtedness did not pose an “immediate threat” to the economy — but it wanted to prevent against a “significant” rise in the number of highly indebted households.
Source: Capital FM website