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Proposal to Stop Housing Bubble

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Bank of England governor Mark Carney put forward the Financial Policy Committee’s strategy to cool the UK property market earlier today.

Mr Carney recommended that financial home lenders, allow the applicant to borrow no more than four and a half times their annual salary, or any greater than fifteen per cent of a lender’s total figure of residential mortgages.


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He also suggested that lenders make sure that the applicant could still afford to service their monthly loan premiums should rates rise by three percentage points more than their original loan rate.

When challenged about the FPC’s stance for preventing a housing bubble, the governor made it quite clear that the committee’s job is purely to focus on the economy and he feels that this will have the right balance for both.

Mr Carney feels there is “not imminent risk to economic stability”, but is aware that “responsible lending can quickly turn to reckless”. He intimated that these proposals will not have an effect on today’s property prices.

He said, “If yesterday you went into a bank or building society and were approved for a mortgage, you will still be approved for that mortgage today, but you can have more confidence in the durability of the expansion.”

He said that he believes this course of action would help keep the UK economy stay stable and added: “These actions will have a minimal impact in the future if, and it is an important if, if the housing market evolves in line with the bank’s central view. The fifteen per cent cap could quickly become relevant if house prices grow more than we expect, if incomes grow less rapidly than we expect, or if underwriting standards slip.”

Bank of England FPC members Spencer Dale, Mark Carney, Jon Cunliffe and Andrew Bailey

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It was expected that the FPC would put a cap on the multiples of salary pro rata to a mortgage, and some reports were predicting the multiples to be less than today’s recommendation.

Royal Bank of Scotland and Lloyds Banking Group pre-empted this by only recently introducing a maximum of four times the earnings for any loan of at least half a million pounds.

Council of Mortgage Lenders director general Paul Smee interprets this action will have a greater effect on London than the rest of the UK.

Mr Smee said “Nationally, nine per cent of new loans are at four and a half times income or more, but the figure is 19% in London.”

Recent official data reveal that property prices in London have risen by a staggering 18.7 per cent within the last year.

The Office for National Statistics reported a few days ago that the rest of the country without including London and the South East was up annually by a more conservative 6.3 per cent.

The average figure borrowed for a home loan across England now stands at £135,200. But many economists and analysts were already predicting the housing market to drop back a bit before today’s meeting. They are convinced that the introduction of the FCA’s new Mortgage Market Review together with the stricter lending measures that have already been put into place will see it lose momentum.

Chancellor George Osborne agrees with the FCP and will use their latest loan restriction steps toward the government Help to Buy scheme. He remarks, “I fully support this action by the Bank of England’s new Financial Policy Committee to use the new powers we have given them.”

Mortgage brokers say that the extra steps announced today will have little further effect for the majority of people, as the MMR has already come into play recently, and lenders are already applying stress tests of various degrees.

The house builders market translated the extra loan measures into good news for the market as shares in Persimmon increased by 6.5 per cent. Barratt’s followed suit rising by 5.5 per cent.

About the author

Peter Davis Peter Davis is a Marketing Analyst at PaydayLoan123 specialising in financial products. Peter writes most of our articles as he stays up to date with the latest information. He enjoys most sports, particularly playing football and watching his favourite football team. Peter really like his food too as we have all witnessed first hand!

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