Admittedly, the latest mortgage figures do not yet seem too worrying. Mortgage loans and liabilities are growing rapidly – the former increased by more than 25% in the first quarter compared to the previous year and the latter by 15%. These are the fastest growth rates since 2007, just before the financial crisis. Despite this, global mortgages only rose 3.6% on the year to £ 1.56 trillion, and are easily overtaken by surging household savings.
In addition, many have taken advantage of historically low interest rates to switch to fixed mortgage rate transactions, making them less exposed to a possible rise in the bank rate. The amplification effect is unlikely to be as great as before. The banking sector is in much better shape than it used to be. The latest stress tests have estimated that the sector is perfectly capable of withstanding a 30% collapse in house prices and a sharp rise in defaults, before needing more capital.
Nonetheless, the overheating housing market is a sure sign of an emerging overheating of the economy as a whole. Defaulted mortgages are already on the rise and now represent almost 1 pc of the total.
The Bank of England cannot afford to find itself in a situation where it is forced to sharply raise interest rates to curb general price inflation. Raising interest rates for the sole purpose of calming the housing market could also be deemed inappropriate, with high levels of collateral damage.
The alternative is the use of so-called macro-prudential tools – essentially a restriction on the ability of banks to lend. Under powers granted by the Treasury in 2014, when there was a similar surge in house prices, the Bank of England’s Financial Policy Committee (FPC) can impose limits on mortgages via caps on loan-to-value and debt-to-income ratios. , including interest coverage ratios for rental loans. These were applied at the time, but then came Brexit, which initially put the brakes on the housing market, and they became surplus to needs. It turns out that there haven’t been a lot of extreme mortgages this time around. The number of new 90% mortgages and very high income mortgages is actually going down.
However, at the rate things are going, the FPC will soon dust off its panoply of macro-prudential tools. Denied the blunt instrument of a bank rate hike, that’s all left for policymakers. Government restriction and diktat of government has become quite a thing since Covid, so no problem there.
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