Canada's Condominium Magazine
When Mark Carney was governor of the Bank of Canada he used to warn Canadians regularly about taking on too much debt, not being able to afford their mortgages if interest rates went up. Now he’s governor of the Bank of England and he has not changed his tune on that score.
“Think about the mortgage you are taking on, the debts you are taking on,” Carney said in an interview with The Guardian. “Are you going to be able to service that mortgage five years from now, ten years from now, if interest rates are higher?”
But Carney has made the news today not for that rather un-controversial opinion. What has caught the attention of economists in England and elsewhere is his announcement that the Bank of England would put the brakes on—he actually said “shift into neutral,” but clearly automotive metaphors are popular when talking about the economy—a government scheme that was set up in 2012 to stimulate the housing market.
The issue Carney is dealing with in Britain is one that Canadians are familiar with: the UK mortgage market, fueled by low interest rates, could pose a risk to the economy at large.
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.
The government’s Funding for Lending Scheme (FLS) that he wants to “refocus” was set up in 2012 to incentivize lending to small businesses and to boost mortgage lending and encourage people to buy homes. Under this plan, the government makes cheap cash available to lenders as long as they in turn pass it along to borrowers. A separate component called the Help to Buy home ownership scheme allows first-time buyers to borrow up to 20 per cent of the price of the home from the government, interest free for the first five years. With a 5 per cent down payment, the homebuyer would then need a mortgage for the remaining 75 per cent of the home’s value. The Help to Buy portion of the government assistance is not affected by Carney’s announced changes. However, new mortgage affordability tests will be put in place by the Bank of England early next year.
In recent weeks, however, the words “property boom” are being heard everywhere in England. While he says there is no immediate danger of a bubble, Carney said that a 7 per cent increase in house prices in the last twelve months, and an anticipated 10 per cent increase next year are enough to warrant his action today, so that “larger interventions” will not be needed later. One of those interventions would likely be an interest rate hike, something he does not want to see now. As he often said while at the BOC, interest rates make “a very blunt tool” that hits all aspects of the economy, not just the housing market.
Evidence of the property boom can be seen in the fact that house prices in Britain rose at their fastest pace in three years in November, and mortgage approvals were at a six-year high. At the same time, there is a shortage of new housing being built. According to Carney, Britain built half as many new houses last year as Canada, despite having twice the population.
The changes to FLS will “refocus” the scheme so that it goes to small businesses exclusively, rather than to support households. Small businesses, said Carney, are starved of credit and lending to them is falling.