Is Carney pulling the rug out from under the housing market?

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.

  • tot777

    Help to buy loans £17bn (out of a potential £80bn initially touted)

    Total amount outstanding on UK mortgages £1.2trn

    Help to buy is a small part of the total mortgage market.

    This is just smoke and mirrors from the slickest central banker in the West.

  • Iaincarr

    The remarks and actions of Mark Carney are purely based on a up surge in property and house building in the south. We are house builders in the North/south Scotland and there has been no price increase or momentum in the market for 6 years. Our sales prices are less than they were in 2006. Perhaps Mark Carney should be made aware of this prior to removing stimulus which is badly needed. The comments won’t help confidence in the North or encourage prospective purchasers.

  • monikie

    FLS loans to SME’s _ Bank Profits ?
    —————— ———–

    Could you please clarify how this works for us readers ?
    My understanding as follows. Please correct where wrong !

    1.) The Govt. give £600mill, (Of our tax money) to RBS,
    at a cost of 0.25% above 0.50% base rate, viz 0.75%….(£4.5mill )

    2.) The RBS loan to an SME’s, at a rate of say 2.5% above
    0.50% base, viz 3%…..( £18mill )

    3.) The RBS also charges 2% for “Loan Arrangement Fees”….( £12mill )
    Why do they raid this from the borrower cash flow
    when they are already charging interest in 2…Greed ?

    4.) The RBS has made a 4.25% profit on every loan given out,
    plus some interest on loan funds not issued….( £25.5mill )

    5) So RBS profits by £25.5K on a £600k loan, and £25.5.mill on £600.mill ?

    Any help appreciated,

  • Changing Man

    What I find disturbing is that Mark Carney claims to base is success on “forward guidance” yet one of the first things he does is to “U-turn” policy causing, for one thing, share prices in housebuilders to drop dramitically. How can an investor plan confidently in this environment?