The Bank of England (BoE) has asked for new powers to limit UK loan-to-income and loan-to-value ratios, so that a UK housing bust can be prevented.
The BoE can already recommend how much banks should allow homebuyers to borrow, based on income and property value, but has no legal powers to enforce these recommendations.
Chancellor George Osborne offered the BoE new powers in June to stop the housing market over-heating; however the Bank didn’t consider them at that time because of their “political sensitivity”. But the BoE’s Financial Policy Committee (FPC) recently set out details of the new regulatory powers it wants.
The FPC wants the government to grant it powers to limit loan-to-value ratios, so that the bank can cap the amount of loans to home buyers relative to the property’s value. Similarly, the FPC wants to be able to force banks to limit loans extended to borrowers with high debt levels in relation to income.
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The BoE has taken into account steeply rising housing prices while making the request for new powers, and these new “powers of direction” would empower it to act quickly in the face of what is beginning to seem like a crisis of overvaluation in parts of the UK housing market.
Parliament will scrutinize the proposals after approval by the Treasury. The BoE’s new powers are likely to be granted before the next UK general election, which will take place on 7 May 2015.
Housing prices continue to rise in the UK. Average UK house prices rose 11.7% year-on-year in July, according to the Office for National Statistics, while London prices were up 19.1%.
A danger sign is that first-time buyers are taking out bigger mortgages. New home buyers borrowed, on average, 84% of the value of the property in July, up from 80% in June, according to the Council of Mortgage Lenders.
This article was republished with permission from Global Property Guide.