The BoE Aims to Reign in Housing Market, Proposes Income Cap

by on May 19, 2014 8:10 am BST

As the housing market in the United Kingdom continues dominating the global market, the Bank of England (BoE) will look to impose unprecedented steps in order to get a handle on the sector and avoid a potential catastrophic bubble. BoE Governor Mark Carney hinted that the central bank could implement a limit capital for borrows as a multiple of their income or require banks to issue some sort of affordability test that would assess the ability for borrowers to adapt to higher mortgage payments when (if ever) interest rates rise – sort of a stress test for homeowners.

Carney will also look to amend the controversial Help to Buy program, which provides home buyer assistant that is backed by taxpayers. Currently, as of April, banks are required to “stress test” mortgage applicants and how they would handle higher interest rates. Unfortunately, it is up to the bank to determine the rate that will apply to the test. “We could do more, we could take steps around affordability to test whether or not individuals can test mortgages at much higher interest rates,” said Carney during the Murnaghan program on Sky News.

The head of the central bank said that the Help to Buy program was relatively small, but it could feed into a housing bubble and was worth keeping an eye on. Deputy Prime Minister Nick Clegg said “the overheating housing market caused huge problems for the economy as a whole.”

In regards to potential steps taken by the BoE, a limit of particular types of mortgages issued by banks is under the central bank’s jurisdiction, according to Carney. “The level of higher loan to income mortgages, ones above four and a half, five times loan to income, potentially could store up bigger problems for the future,” said the BoE Governor.

Banks will be forced into modeling a 30 percent depreciation in the Sterling and a 35 percent decline in home prices, resembling a 1980s-style recession, as part of their own stress tests.