The biggest risk to financial stability in the UK centres around the housing market, said Mark Carney, governor of the Bank of England
Speaking on Sky News yesterday Carney said: “We are vigilant about risk around the housing market. We must ensure risks aren’t building for the medium term, in other words that banks have enough capital when underwriting mortgages and, most importantly, that individuals can afford the mortgage over the life of the mortgage.
“We don’t want to build up another big debt overhang that will hurt individuals and slow the economy.”
He explained that the Funding for Lending Scheme was put in place under extreme circumstances to get the housing market going. At the end of last year then the Bank stopped subsidising mortgages by taking its foot off the accelerator and stopping FLS.
The Bank did two more things: first, it put in new underwriting standards, such as the need for lenders to verify income. Carney said non verification of income was, “unwise at best, and dangerous at worse”.
Secondly, the Bank is introducing stress testing by seeing how the banks would respond if house prices fell by a large amount (35 per cent).
Carney said the Bank could do more: “We could test whether borrowers could afford mortgage at much higher interest rates, we could limit certain types of mortgages.”
Talking about the government’s Help to Buy scheme, Carney explained how it was put in place for reasons of access, mainly for first-time buyers who need high loan-to-value mortgages in order to get on the property ladder: “It’s a pretty targeted programme, a relatively small programme at this point but it could grow a lot.
“We will provide advice to the government publically if we think there should be changes but the ultimate decision is the government’s.”
However, CEO of conveyancing firm LMS, Andy Knee, said Carney’s comments reflect a lack of understanding of the market.
“I think there’s a danger that having these views will lead to political resistance”, said Knee.
“With Carney’s comments on affordability checks it sounds as though he is unfamiliar with the Mortgage Market Review (MMR) which has just come into effect.”
He suggested that one way of bringing funding to the market would be to withdraw tax subsidies for buy to let landlords.
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