FPC will 'closely monitor' property market, while FCA will assess vulnerability of hedge funds to rate changes
The Bank of England has stepped back from taking immediate action to cool the housing market but is monitoring property values closely afterhouse prices returned to their pre-crisis levels.
The Bank's financial policy committee, which meets quarterly to assess risks to the financial system, said it is also reviewing work by the Treasury on preventing the risk of cyber-attacks to the banking industry and stepping up its assessment of the vulnerability of hedge funds to sudden changes in interest rates.
At a time when George Osborne's housing market schemes are raising concerns about sharp rises in house prices – particularly in London – the FPC said it would "closely monitor developments in the housing market and banks' underwriting standards".
"The committee would be vigilant to potential emerging vulnerabilities," it said in a statement released following its meeting on 18 September. The committee, which is chaired by Bank of England governor Mark Carney, said if it did decide to deploy any of its powers to cool the market – such as forcing banks to hold more capital – it would do so gradually.
But while it is not moving immediately to cool the housing market, the FPC has been assessing the impact that sharp upward moves in long-term interest rates could have on households and major financial institutions.
While it concluded that there was no immediate threat to banks and insurance companies it wants more information about the impact on hedge funds, which borrow money to take bets on stock markets, currencies and commodities.
The City regulator, the Financial Conduct Authority, will now assess the "potential amplification" through the financial system of interest rate changes – or perceptions of interest rate changes that may be caused by central bank policies on reducing the stimulus currently being pumped into markets to keep interest rates low.
"The levels of leverage within, and therefore the vulnerability of, hedge funds needed to be looked at more closely," the FPC said.
The FPC's comments on the housing market will be closely watched by the market as the chancellor has insisted he is not creating a housing bubble – even though property prices have broken through their pre-crisis peak. The average price of a UK house has passed the peak five years ago of £245,000 but Osborne has said the FPC will have powers to stop any over-inflation in house prices.
The FPC noted that while mortgage approvals in July were 30% higher than a year earlier and average house prices in August were 5% higher, activity in the housing market was nevertheless below historic averages. "Households' debt servicing costs were low and the ratio of house prices to earnings was at its level of a decade ago," the FPC said.
The committee said it could force banks to change their lending criteria, impose additional capital requirements and make recommendations to the regulators on tightening affordability tests for borrowers.
Martin Beck, UK economist at Capital Economics, said it was reasonable for the FPC to hold back on intervention even though house prices compared with earnings are still above the level of the 1980s housing boom. "This growing unaffordability should act as a natural check on house price growth. There is no suggestion that banks are about to return to the very loose lending conditions of the mid-2000s, with 110% mortgages and self-certified loans. So the workings of the market may stay the hand of the FPC in having to intervene."
Article Source : http://www.guardian.co.uk
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