BoE could raise mortgage costs for banks to stop bubble
Deutsche Bank says Bank of England could use new powers to raise the cost to banks of writing new mortgages to stem rise in house prices
BoE could hit banks with new charges to dampen property prices
Mark Carney, Governor of the Bank of England, has warned about the risks of a new house price bubble in the UK Photo: Paul Grover
By Harry Wilson, Banking Editor
Fears over a house price bubble in London and the South East is likely to push the Bank of England to increase the cost to banks of making new home loans.
The Bank of England’s Financial Policy Committee (FPC) could copy the move on Thursday by the Swiss regulator to increase the capital requirements on residential mortgages to dampen the property market, according to analysts at Deutsche Bank.
In a report sent out to clients, analysts at the German investment bank said they expected the FPC to lift the minimum capital weight on UK home loans from 15pc of their value to 20pc as concerns grow of a house price bubble.
The use of the power would mark the first time the Bank of England has directly intervened to slow down the growth of mortgage debt in the banking sector and would be seen as a way of avoiding a more painful rise in interest rates.
“We think the impetus here will be as much to take some heat out of the London and South East housing market as to show action in the face of a rapidly recovering domestic economy which can’t really afford higher interest rates,” said Deutsche Bank.
In December, house prices staged their largest monthly rise in four years as the cost of the average home rose by 1.4pc, the greatest increase since August 2009. Year-on-year, property has risen by 8.4pc, according to figures from the Nationwide, which warned that "affordability may become stretched" if prices continued to rise at the current rate.
The FPC was created by the Coalition Government as part of its reform of British financial regulation. The 10-strong committee is chaired by Mark Carney, the Governor of the Bank of England, and its members are drawn from across the Bank and the UK’s two financial regulators, as well as former senior financiers, including Martin Taylor, a former chief executive of Barclays.
According to Deutsche Bank, if the FPC were to vote for an increase in the capital requirements on UK mortgages it could cost Lloyds Banking Group, Britain’s largest provider home loans, about £1bn in extra capital and a further £1.45bn for the country’s other major banks.
Regulators in other countries frequently use targeted capital requirements to control house prices. In Hong Kong the use of higher capital charges on mortgages is the main tool used by the authorities to control the province’s property market.
However, in the UK the use of such a tool to limit mortgages could prove controversial and regulators have warned in recent years about the public anger that could be caused by their use.
Michael Cohrs, a former senior banker and until last year a member of the FPC, said in 2012 that to “take away the punch bowl” to end an “electorally-popular credit boom” could prove controversial.
Mr Cohrs said: “To make a success of financial policy the FPC must be empowered to take decisions which are enforceable and which will have a real impact.”
Since taking over a Governor last year, Mr Carney has sounded warnings about the property market and in November the Bank of England scrapped its Funding for Lending programme to support lenders making new home loans.
A month earlier, Mr Carney said there was a need for “vigilance” to guard against the risk of a housing bubble.