Bank of England governor Mark Carney speaks during a Financial Stability Board press briefing at the Bank of England in London on March 31 2014
Mark Carney, Bank of England governor

Mark Carney has signalled the Bank of England stands ready to take targeted action to try to stop the housing market from derailing the economic recovery.

The central bank’s governor warned in a television interview on Sunday that Britain’s housing market had “deep” problems and posed the biggest risk to the “durability” of the recovery.

He stressed the BoE was powerless to address the UK’s chronic undersupply of housing. But he said the central bank could ensure that banks were strong enough and underwriting standards tough enough to “reduce the risks that come from a housing market that has deep, deep structural problems”.

House prices in the UK have climbed a 10th in the past year as the economy has revived and the number of housing transactions is up a third. New lending at high loan-to-income ratios has surpassed pre-crisis levels.

Mr Carney told Sky: “When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion, those risks centre in the housing market and that’s why we are focused on that.”

His comments prompted Nick Clegg, the deputy prime minister, to say the government should “pare back” its controversial Help to Buy scheme of mortgage guarantees if the Bank of England thought it necessary. The scheme has been roundly criticised by economists for fuelling demand rather than tackling directly the problem of insufficient supply.

Mr Carney’s comments follow a similar warning from Sir Jon Cunliffe, BoE deputy governor, who said earlier this month it would be “dangerous to ignore” the momentum that had built in the housing market.

Their words have focused attention on June’s meeting of the central bank’s Financial Policy Committee, at which it will unveil the twice-annual Financial Stability Report. Mr Carney’s comments increase the likelihood of some sort of action, possibly as soon as next month.

As Mr Clegg highlighted, one of the FPC’s options is to recommend the government cancel or limit the scope of the second phase of Help to Buy, which offers mortgages guarantees to borrowers with small deposits.

Mr Carney told Sky the scheme was “pretty targeted” and “relatively small” but added: “It could grow a lot and it could change attitudes in other parts of the mortgage market, that’s why we have to be vigilant.”

The FPC has a range of other options too. One would be to force lenders to hold more capital against mortgage lending. That is a course other EU countries have taken – for example Sweden, which has increased the minimum risk-weights on secured loans.

Another approach would concentrate on the newly instituted Mortgage Market Review, under which the Financial Conduct Authority has been imposing affordability tests to accurately gauge borrowers’ incomes and ensure they can withstand adverse changes in interest rates and still meet mortgage payments.

The FPC has the ability to ask the FCA to further toughen the affordability standards – for example by requiring borrowers to show they could pay even higher interest rates on their loans than are already used in the new assessment.

The Bank can also request the imposition of ceilings on loan-to-income ratios – tools that have in other countries proven effective in curbing exuberance in the past.

An alternative would be a cap on the ratio of a loan’s size to the value of the house.

The ultimate weapon would be a rise in interest rates, but Mr Carney has said repeatedly that would only be a “last line of defence” because he does not believe the economy is ready for higher borrowing costs.

● Mr Carney is to help with the appointment of a senior figure to a new body overseeing banking standards in the UK, adds Sam Fleming.

The Bank of England governor will lead a selection panel to choose the chair of the Banking Standards Review Council, which is being set up following a report by Sir Richard Lambert, a former chairman of the CBI business group and former FT editor.

The final report is due to be revealed on Monday following a commission by Britain’s seven biggest lenders.

Get alerts on UK house prices when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article