The British Government has published a consultation detailing what tools will be made available to the Bank of England to regulate high-value mortgage lending, but has said that a similar review of the buy-to-let market will not take place until 2015.
The Bank of England-owned Financial Policy Committee requested the power to limit loan-to-value ratios for residential lending, and debt-to-income ratios for buy-to-let lending, on 2 October. Specifically, the FPC requested that it be given the power to direct the bodies responsible for regulating the financial sector – the Financial Conduct Authority and the Prudential Regulation Authority – rather than simply recommend courses of action they might take to limit high-risk lending.
In its report, the FPC stated:
“The housing market can pose direct and indirect risks to financial stability, as has been seen in the United Kingdom and internationally.
“The direct threat arises because mortgage lending is the single largest asset class held by UK banks in aggregate... The indirect threat arises because mortgages are the single largest liability of UK households, representing 80% of household debt. Highly indebted households cut back spending sharply when the unexpected happens, which is why recessions that follow periods of rapid credit growth tend to be deeper and longer lasting.”
The FPC also cited a “self-reinforcing loop” of overextended borrowing and rising prices that amplifies these risks.
The government released its response on Thursday 30 October. Aimed at consumers and industry professionals, the response is currently in consultation state, and will run until 28 November. In it, the government proposes that the FPC is granted powers of direction “in respect of owner-occupied mortgages”; however, buy-to-let mortgages will be the subject of a separate consultation:
“The Government intends to consult separately on these recommendations in 2015 with a view to building an in-depth evidence base on how the operation of the UK buy-to-let housing market may carry risks to financial stability.”