Governor Mark Carney announced the first limits on the mortgage market in 30 years – restricting the amount that homeowners can borrow relative to their income and tightening the affordability tests would-be homeowners face when applying for a mortgage – but he acknowledged there would be no immediate impact on fast-rising property values.
Presenting the Bank's half-yearly assessment of risks to the financial system, Carney said that UK households start from a "vulnerable position" with debt at 140% of disposal income. "This is the limits of our tolerance and that's why there is a cap in place. We will evaluate [and] if we need to recalibrate, we will," he said.
The Bank calculates that its new measures will only start to have an effect if house prices rise more than 20% between now and the first quarter of 2017.
Lenders and house builders were relieved that Threadneedle Street had not taken more drastic steps. The mortgage industry had been braced for tougher action from the Bank after the chancellor used his Mansion House speech earlier this month to give Carney new powers to prevent a fourth bubble in the housing market since the early 1970s.
Carney said the Bank was aware of the risks of reckless lending but said a "graduated and proportionate" response was called for.
"These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank's central view," he said.
The governor said they would only bite "if there is sustained momentum in the housing market over the coming years and that's accompanied by further sharp increases in high loan to income lending".
While lenders agreed that the new measures would not immediately affect the market, the policy nevertheless breaks new ground as a result of regulatory changes introduced by the coalition government after the 2008 banking crisis.
Under the measures announced on Thursday, The Bank of England's financial policy committee – set up to monitor risks after the crash of 2008 – is restricting banks' and building societies' ability to lend out more than 15% of their mortgages to customers needing to borrowing four and half times their income.
It acknowledges the move will have no immediate impact as no lender is currently at that ceiling. The same limit will be imposed on mortgages covered by the government's help to buy scheme, designed to encourage lending.
The Bank is tightening the interest rate being imposed on new borrowers through a mortgage market review which tests customers' ability to repay their loans. This is similar to the current "stress" of a 7% interest rate imposed by most lenders.
Economists at Capital Economics said it was a "missed opportunity" to make homes more affordable.
House prices in London have breached their 2007 peak and the Bank expects house price inflation to remain at similar levels for the next 12 months.
Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, was supportive of the Bank's step by step approach but said the FPC was largely unknown to the public. "Further use of tools such as these could, in the long run, have a big effect on millions of people."
In its half-yearly financial stability report, the FPC said: "This action is designed specifically as insurance against the risk that there is greater momentum in the housing market than currently anticipated and that, as a result, lenders face growing demand for loans at very high loan to values," the Bank said.
"The FPC does not believe that household indebtedness poses an imminent threat to stability. But it has agreed that it is prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households."
Share prices of Britain's leading housebuilders Persimmon and Barratt Developments were among the biggest risers in the FTSE 100, gaining almost 5% on relief that there was no immediate clampdown. The Bank underscored lack of supply, with 110,000 new homes built in 2013 – below the 180,000 average of 2000 to 2007.
Lucian Cook, head of residential research at Savills UK, said: "The measures announced today are not nearly as draconian as they might have been had the FPC applied absolute loan to value or loan to income caps at an individual mortgage level."
Bailed out banks Lloyds Banking Group and Royal Bank of Scotland have already taken steps to limit some lending to four times a customers' income. Lloyd Cochrane, head of mortages at RBS said he expected no significant impact on its lending.
Carney rebuffed suggestions the Bank was not taking swift action to tackle potential risks, saying: "This is action. We're acting early. We can do it in a way that doesn't slow the economy."
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