Can the Bank of England save the UK property market?

Rising property prices have sparked fears that the current UK housing boom is heading for a bust, prompting Mark Carney, governor of the Bank of England, to ask for greater power to intervene in the UK housing market. His request has been granted, but how effective will these new powers be, and what does it mean for home buyers and government schemes such as Help to Buy? We take a look at this story in more detail.

Learning from the lessons of 2008

Carney claims that the 2008 housing crisis could have been prevented if the Bank of England (BoE) had more power, especially regarding the ability to restrict high lending. With UK housing prices so high, more home owners have come to the conclusion that they have to sell their properties while they still can, and this panic selling has led to speculation that the UK housing bubble is set to burst.

The introduction of stricter mortgage lending criteria has succeeded in slowing down activity in the housing market, with the number of mortgages approved falling to 62,918 in April (the third drop in a row. The Financial Policy Committee (FPC) also reports that high loan-to-value lending only accounts for 9% of mortgages (as opposed to 25% before the crash in 2007, suggesting that the risk posed by high lending is being exaggerated). It may not be enough to stave off another crisis, however, so it's been decided that the BoE must be granted the power to implement greater safety measures.

Under the new legislation, the BoE will be able to take the necessary actions to cool down activity in the housing market, thereby lowering house prices before things get out of hand. According to Chancellor George Osborne, the BoE will be given powers to “direct”, whereas before it only had the power to recommend. It will be able to limit the amount that property investors can borrow according to their income, ensuring that landlords do not end up with mortgage payments that exceed their rental income. These powers will apply to both residential and buy-to-let mortgages.

Review of Help to Buy Scheme

The BoE's report also included a review of the Help to Buy scheme. Introduced last year, the scheme allows for first-time home buyers to have their purchase subsidised by the UK government. The scheme succeeded in boosting activity in the property market, but also received criticism based on fears that it would accelerate activity to a degree that would bring about another housing bust.

First-time home buyers will be pleased to know that the BoE report suggests otherwise. Carney's report states: "Under current market conditions, the committee assesses that the scheme does not pose material risks to financial stability," adding that Help to Buy was not to blame for rising house prices and accounted for only 5% of mortgages. So it seems that fears were unfounded and government subsidies will remain an option for first-time home buyers for some time to come.

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