Shares in house builders have taken a bit of a hammering this morning.
That’s because Bank of England governor Mark Carney took everyone by surprise by acting to slow down the UK housing market. From next year, the Funding for Lending Scheme (FLS) will focus on helping banks to lend to businesses, rather than to homebuyers.
Carney said it was “no longer appropriate to have our foot on the accelerator, better to shift it to neutral”. The Bank will also force lenders to use tougher affordability tests when they evaluate potential mortgage loans – in other words, lenders need to be confident that a borrower will be able to repay the loan.
The FLS was introduced in 2012 and offered cheap government funding to banks if they increased their mortgage lending. Support was also provided for personal loans and lending to businesses.
The scheme almost certainly boosted mortgage lending. Trouble is, it also triggered further falls in interest rates on savings accounts. That’s because once lenders could borrow cheaply via the FLS, they had less need to attract deposits from savers.
Does that mean good news for savers? Well, we might now see some modest rises in the savings rates. But it’s far from certain. Even after today’s changes, some banks will still be able to get to cheap funding for mortgage loans; it depends on whether they’ve used up their existing FLS allowance or not. (They’ll only be able to increase their allowance by lending more money to business.)
And let’s not forget, today’s announcement doesn’t affect the government’s Help-to-Buy scheme, which provides support to potential homebuyers who only have small deposits. Help-to-Buy is the ‘bigger deal’ of the two schemes and there’s no sign that the government has any intention of ending this one.
This is more of a political, than a financial, move
So you could argue that the real impact of today’s FLS change is symbolic. Indeed Capital Economics says that lenders have been reducing their use of the FLS in recent months anyway.
In fact, it’s possible that the tightening of the affordability rules will have a bigger impact, but until we know what those are, I wouldn’t be holding my breath for a massive change.
Still, symbolic or not, I’m impressed that Carney has been able to get Osborne to sign off the move. Whether or not that’s a canny political trick to give the illusion of some form of prudence, given recent headlines fretting about new bubbles in the housing market, I’d still assumed that Osborne was determined to use every tool in the box to boost house prices.
But I suspect Carney’s chances of getting Help-to-Buy dropped early are rather slimmer.