The governor of the Bank of England has issued a blunt warning to potential home-owners that they must be able to pay their mortgages when interest rates go up and not rely on being bailed out of any future difficulties by rising house prices.
In an interview with the Guardian, Mark Carney said on Friday that Threadneedle Street's decision to rein in mortgage lending was designed to head off a boom-bust in the property market at an early stage and avoid drastic policy action in the event of a bubble.
"Think about the mortgage you are taking on, the debts you are taking on," Carney said when asked what his message was to those aspiring to get on the housing ladder. "You are taking at least a 25-year mortgage, maybe a 30-year mortgage.
"Are you going to be able to service that mortgage five years from now, 10 years from now, if interest rates are higher? Or are you counting, even subconsciously, on the price of your house keeping going up and if something happens an ability to sell it quickly and not facing the consequences of not being able to pay?"
Carney was speaking as the latest data from Nationwide building society showed annual house price inflation at 6.5% – its highest since July 2010. The governor expressed concern about the lack of new homes being built as the Bank's own figures demonstrated that demand for property was strong. Mortgage approvals are running at levels not seen since Northern Rock was nationalised in February 2008.
In a wide-ranging interview that included bankers' pay, City scandals, the Co-op bank rescue plan and his plans for the Bank of England, Carney said:
• Reform of the conduct of the financial sector is overdue.
• The Bank is increasing its scrutiny of bank executives following the scandal at the Co-op involving the Rev Paul Flowers.
• The Bank of England is anxious for the private-sector restructuring of the Co-op to go ahead but would step in with its own rescue if bondholders rejected the deal.
• He opposes the cap imposed by Brussels on bankers' bonuses, due to come into force next month.
• He wants more women in senior positions at the Bank of England to address the gender imbalance at the top.
The newly appointed Canadian governor of the Bank justified the decision by the Bank's Financial Policy Committee (FPC) to end Funding for Lending for home loans a year earlier than planned.
The scheme has been regarded as crucial in reviving the housing market since it was introduced in August 2012. It offers lenders cheap money in return for loans to customers, but from the new year it will be limited to business lending – still falling according to fresh figures from the Bank.
"The right way to do policy – to protect against the boom and bust cycles – is to act early in a graduated, proportionate way and that reduces the probability of having to act in a bigger way later."
He added: "I'm less concerned about the housing market, given the steps the FPC has taken."
He said that Britain was building half as many homes a year as Canada despite having a population twice as large, and added: "It is widely acknowledged that there is a very large supply-side issue here.
"I fully recognise that Canada is the second-biggest country in the world. It's easy to build housing as it's easy to find places [to build]. But it does give you a sense of the issues around the constraints on supply and the movements in prices you see as well. They all reinforce that sense that there is a supply issue. And there's nothing the Bank of England can do to change that."
The governor expressed a reluctance to use interest rates as a way of cooling down the housing market because it would affect all parts of an economy only just recovering from recession.
"You could use [interest rates] to address financial stability but it is a very blunt tool. It hits all aspects of the economy from the south to the north from across manufacturing. It affects exporters. It has a range of impacts – SMEs [small and medium-sized firms] as much as people borrowing for detached homes in Knightsbridge."
House prices are forecast to climb a further 10% next year and the Bank of England has embarked on a range of measures to try to temper the appetite for home loans. Affordability tests being introduced next year will require mortgage lenders to assess a borrowers' ability to repay a loan and lenders will be watched to ensure they do not relax lending criteria too much.
"What we don't want to see is a marked deterioration in underwriting standards that often happens, whether it's here or abroad, when a housing cycle really gathers momentum. It's one of the things that feeds momentum, so we want to see prudence from lenders," Carney said.
The governor said the Bank had enough powers to prevent a housing bubble as the FPC can recommend to the regulators that lenders take a tougher stance on the size of a mortgage compared to the value of the house – the so-called loan-to-value (LTV) ratio. He said that if the Bank did in the future recommend any caps on LTVs, he expected lenders to heed the warning.
"We have to make the case to act, convince people of the case, but it is not insubstantial if the FPC stands up and recommends that there should be a cap on loan to values just as a hypothetical example," Carney said.
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