Bank of England Given Explicit Powers to Deal with Housing Bubbles

Date Published 6/27/2014
Author Marja Hoek-Smit
Theme Housing Finance Policy
Country United Kingdom

June 12, 2014

HM Treasury, Chancellor of the Exchequer, the Honorable George Osborne, in his 2014 Mansion House Speech, announced that he had given the Bank of England (BOE) extensive powers to put limits on the proportion of high loan to income mortgages each bank can lend, or even ban all new lending above a specific loan to income ratio, in case it deems the amounts of mortgage debt being offered excessive.  In addition, if the BOE really thinks a dangerous housing bubble is developing, they will be able to impose similar caps on loan to value ratios.

He acknowledged that there is no immediate cause for alarm since house prices are still lower in real terms than they were in 2007 and are forecast to stay below that peak for some years to come. Also, debt-servicing costs remain at near record lows and rental yields are in line with long term trends. And, the average loan to value ratios for new lending are still well below normal.

However, the ratio of house prices to incomes is high by historical standards and so are average loan to income ratios which have risen to new highs.

“So we act now to insure ourselves against future problems before they can materialize” according to the Chancellor, by giving “the new Financial Policy Committee (FPC) in the Bank of England the authority and the macro-prudential tools to act.”

Earlier this year, the regulators had already put more rigorous mortgage standards in place.

The Chancellor emphasized that “decisions to use these powerful tools are made independently of politics by the Bank of England.” He promised that these powers are legislated for and in place before the end of Parliament.

Link to full speech

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