The Bank of England has taken to living dangerously under its Canadian governor Mark Carney.
The once tame Old Lady of Threadneedle Street took more potshots at two of Britain’s most formidable constituencies yesterday, angering both Eurosceptics and the UK’s legions of private buy-to-let lenders.
Outlining this year’s stress tests for the banking sector, the bank’s financial policy committee (FPC) – which is responsible for assessing financial stability and identifying and tackling potential risks to it – said British banks should raise the bar for mortgage lending to buy-to-let landlords.
For a double whammy, it also reiterated the financial risks of Brexit following this June’s EU referendum.
Unlike in Ireland where private buy-to-let investors have not returned since 2008, Britons’ love affair with bricks and mortar continues unabated. With the silver pound deserting equities for houses – creating the so-called “grandlord” phenomenon of pensioner landlords – overall buy-to-let lending is surging. The Bank’s figures show it rose from 11.3 per cent of all new loans at the height of the boom in 2007 to 15.6 per cent in the third quarter of last year.
Yesterday’s move on landlords was well signposted. Sir Jon Cunliffe, the bank’s deputy governor warned the House of Lords earlier this month that he was worried by the systemic risk of buy-to-let landlords selling up en masse if their rental income no longer covered mortgage costs, or if they saw property prices fall by 10 per cent. Carney made similar comments himself last December.
Over-inflated market
Reasoning such an event could push the UK’s over-inflated housing market into a downward spiral from which the country would not easily recover, the bank governor asked for – and was given – extra powers to clamp down on buy-to-let mortgage lending by the chancellor earlier this year.
In a twin-pronged assault George Osborne declared his own war on landlords in his recent budget, introducing a 3 per cent stamp duty surcharge and – from 2017 – cuts to mortgage-interest tax relief.
The Bank’s Prudential Regulation Authority (PRA) is now proposing that banks and building societies take account of landlord’s wider rental costs, tax liabilities and living costs and make more stringent checks on prospective landlord’s additional income where it is being used to underwrite a mortgage. Many reading this likely will be surprised they were not already doing the latter.
This all sounds rather sensible, but it left the UK’s property industry complaining yesterday that Osborne’s measures should be given the chance to feed through before further moves are made to depress the buy-to-let sector. In reality though, the impact of the measures, which are out for consultation until the end of June, is likely to be small. The PRA estimates buy-to-let will grow 17 per cent this year, compared with a forecast 20 per cent.
The real yelping came from the Out campaign. With Vote Leave, the Outters’ group chaired by justice secretary Michael Gove, concentrating on its classy dossier of murders and rapes committed in Britain by 50 EU criminals, it was left to Tory MP Jon Redwood, a minister in Margaret Thatcher’s government, to take a retaliatory swipe at the bank and Carney.
"They will have to be very careful to remain neutral, they do have a tendency to wade in on one side of this," Redwood told The BBC's World at One radio programme.
Carney was accused of taking “dictation” from Downing Street by Eurosceptic Tory MPs earlier this month when he first outlined the bank’s concerns about the UK’s Brexit risks. Tory MP Jacob Rees-Mogg said his comments were “beneath the dignity of the Bank of England”.
Borrow money
What the bank is concerned about is the ongoing ability of the UK’s public and private sectors to borrow money on the international market at a low cost in the wake of Brexit.
Given Britain’s record level of public debt this seems not unreasonable and Carney deserves great praise for his honesty. But Eurosceptics and buy-to-letters are formidable bastions of Britain and it takes a brave man to face them down.
A new opinion poll released by MORI yesterday underlines how close the vote remains. The poll put Stay at 49 per cent, with 41 backing Leave, but the margin has narrowed considerably from last month when only 36 per cent indicated leave. With 86 days to go, it's still all to play for. Helen Power is a former M&A correspondent of The Times
