Licensing Costs Deemed a Postcode Lottery
21st Mar 2019
Measures announced yesterday by the Bank of England (BoE) to stem increasing debt and curb rising house prices have been described as a "firebreak" move by governor Mark Carney. It is hoped that the new rules will stop a mass of people moving into riskier mortgages, a major cause of the housing bubble experienced across Europe and the US in 2007 that ground the global economy to a halt.
The measures are two-fold, the first element of which focuses on loan-to-income limitations; this is supported by a secondary measure to tighten affordability checks. From October, the new rules mean that only 15% of a bank's new mortgages for residential home purchases can be higher than 4.5x a borrower's income. At present, the pending limit has not been exceeded by any lender, with the average ratio currently sitting around the 9% level on a national basis.
Commentators have warned however such a cap would have a more meaningful impact in London, where the 9% figure is more like 19% for the capital, according to Paul Smee, director general of the Council of Mortgage Lenders.
Coming into effect immediately, borrowers will have to show they can repay their mortgage under various underlying interest rate scenarios. Stress-testing a borrower's ability to pay has previously extended to a base rate environment of 1% (currently at 0.5%), whereas the new rules will extend such testing to a level of 3%, a rate not seen since November 2008. Such moves are in line with recent recommendations from the International Monetary Fund (IMF).
The financial market's response has been that the rules were softer than expected, highlighted by house builder equities gaining 5% on the trading day. This momentum has continued this morning, with Balfour Beatty Plc gaining 2% in early trading, at the time of writing. Carney hastened to add that the move will have no impact on the separate decision on interest rates, however the market continues to price in an increasing probability that rate rises are on the horizon, reflected in the strength of the pound, with GBP against the USD breaching 1.7, a level unseen since October 2008.
UK house prices have been the subject of much press coverage over the last year, with recent figures showing UK house price inflation at it's highest in four years. The rebound has been helped by persistent and low interest rates, robust employment figures, a growth in international cash buyers and government sponsored credit schemes such as Help to Buy.
George Osborne welcomed the new rules, confirming that no loans under the 'Help to Buy' scheme would be issued at a loan-to-income ratio above 4.5x. Further, 'Help to Buy' data highlights that fewer than 5% of mortgages under the government-backed scheme have been issued at ratios above this target level.
Given that the BoE has no power to stop cash buyers, Carney has stressed that the only real way to ultimately improve stretched housing affordability in the UK is to build more homes - a comment that will add fire to the Labour Party's criticisms of Osborne's Conservative coalition for failing to do enough. It will be interesting to observe how stricter planning rules to move students out of "student ghettos" and into purpose-build accommodation will help housing affordability by releasing a large number of current student homes back into the conventional residential space.
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