With housing prices up a staggering 18.5 percent over the past year in London, many people are worried that the housing market is experiencing a bubble. The main concern is that this bubble could pop at some point in the not so distant future causing a collapse in the economy. This fear has caused new lending regulations to be implemented with the goal of bcoolingb the market down and preventing a collapse. Bank of England Governor, Mark Carney, announced that these new changes include a rule that prohibits banks from lending more than 15 percent of their total loans to borrowers at 4.5 times income from 1st October 2014. This change is in addition to the new mortgage market review. Both these new restrictions may have an impact on the housing market.
A recent study has discovered that the average home in London costs over fourteen times average income with some mortgage to income rates well above 4-5 times income. With numbers that high, it is easy to see why economists are concerned. At a rate of 4-5 times income, consumers may have issues paying back their mortgage and with home prices so high, many first time buyers may be unable to purchase a home. Both of these concerns could ultimately slow down the economy. This could also cause many high-risk loans to default which could send the economy into a downward spiral.
Because of these issues, the Bank of England just made a new rule preventing lenders from lending no more than 15 percent of their total loans at great than 4.5 times income. This is especially alarming for lenders in London since over 19 percent of their loans are given out at greater than 4.5 times income. This cap should prevent too much risky-lending as well as prevent the housing market from a shock.
Additionally, the FCA will require lenders to stress test whether borrowers can handle a 3 percent interest rate increase over a five-year period. However, the FCA havenbt been prescriptive as to whether this should be applied to the lenders’ standard variable rate or the rate of the product – this will be for the lenders to decide.
Both these regulations are in addition to the Mortgage Market Review enacted in late April this year. The MMRbs goal is similar to these new regulations. Its main features are to place stricter regulations on lenders in order to prevent consumers from taking on a mortgage that they cannot afford. Lenders now need to follow tighter lending regulations so the market is not flooded with too many high-risk loans.
A challenge with each of these changes is that they need to be strict enough to prevent a market collapse while at the same time the new rules cannot be too strict that they shut out first time homebuyers. This is a continuing issue and many steps have been taken by the government to prevent a housing collapse, but only time will tell if these new regulations will have any effect on the market.
Our initial thoughts are that whilst we encourage prudent lending practices from lenders, these measures would appear soft and unlikely to have a huge impact on demand or availability of mortgages, affecting London primarily. We will be following this closely and update accordingly so watch this space.