Five years ago, the Bank of England’s Financial Policy Committee exercised its new macro-prudential powers for the first time. It announced two levers designed to slow an inflating housing market, that would come into effect later that year: A stress test of an extra 3 per cent on rates (the “affordability test”); and a 15 per cent cap on the proportion of new loans with income multiples of 4.5 or above (the “LTI flow limit”).
While not universally popular within the mortgage industry at the time – in part because MMR was still bedding down – lenders saw that they provided useful insurance against the future return of boom-bust conditions and were grateful that the measures were not directed towards shrinking the market.
Their acceptance also rested in part on the presumption that the new housing tools would be kept under review and adjusted in line with changes in economic and market conditions.
The reality of the past five years has been rather different.
The FPC has neither adjusted its housing levers to reflect the welter of tax and regulatory changes heaped on buy-to-let, nor the extension of its macro-prudential powers to cover the BTL sector.
Furthermore, the imposed affordability test has yet to be recalibrated in line with the FPC’s own downwards shift in longer-term interest rate expectations.
Instead, the bank has altered its rationale to one of insuring against a wider range of economic shocks – including unemployment.
Most recently (mid-2017), the FPC acted to remove lenders’ discretion over how to apply its affordability test, opting for a seemingly ‘one size fits all’ approach.
So, what should we make of the first five years of macro-prudential intervention?
The housing market certainly has a very different look and feel to 2014, with most current metrics pointing to more subdued conditions.
To the FPC, the recent slowing of the housing market demonstrates the value of the housing levers it has put in place.
Whilst these measures have helped guard against the downside of a boom and bust market, the bank seems reluctant to acknowledge that they may have also had adverse consequences, or that these could be significant.
The basic issue with the bank’s approach is that its tools relate solely to the perceived affordability of a mortgage loan, relative to a household’s income. They do not take into account whether such a loan would actually allow someone to get on the housing ladder.
The result is a situation where first-time buyers – the most highly-leveraged group of borrowers – struggle to access sufficient lending after stress testing and loan to income caps are implemented.
While the bank might see this as a prudent restriction on ‘higher risk’ customers, the unfortunate flipside is a situation where the number of FTBs– now about 360,000 annually – has only just regained decade-earlier levels and is still low when set against the record number of young people in the UK.
As property prices become more expensive relative to incomes, borrowers will need a higher income multiple, or they will have to make up the difference with a larger deposit. When the FPC’s housing levers constrain what can be lent, they effectively act to ration home ownership, excluding some households and promoting the role of the Bank of Mum and Dad.
So, for example, the latest mortgage lending administration return mortgage figures published by the FCA show a much higher proportion of joint mortgage borrowers over recent years.
However, it is not just new buyers who have felt the adverse effects. Older households, too, have had less recourse to 35- or 40-year loans in order to stretch income multiples.
While the FPC should not be held accountable for wider policy failures, for which it has no remit, it does need to recognise the social impact of its policies – especially as they affect the young.
Everyone in the mortgage industry has a vested interest in maintaining a sensible trajectory for the housing and mortgage markets, but there needs to be a fuller debate about how to help the next generation.
It makes no sense to praise the FPC’s housing tools if the trade-off for a relatively risk-free housing market is the exclusion of so many potential FTBs.
Together, we need to find responsible ways in which more people, especially younger people, have a realistic chance of owning a home.
One obvious avenue to explore is whether we can facilitate higher LTV borrowing for FTBs, perhaps by relaxing the affordability test for this group, but still in a prudent and sustainable way.
The proportions of new lending advanced on LTVs above 90 per cent and over 95 per cent have been flat over recent years and are only a fraction of pre-crisis levels, suggesting that there is some wriggle room.
Let’s hope that the FPC’s housing levers are more nuanced five years from now.
Bob Pannell, economic adviser to the Intermediary Mortgage Lenders Association