Bank of England warns on housing market as it relaxes capital rules

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The Bank of England has said the housing market could pose a risk to the UK’s financial stability as it moves to free up £150bn of extra bank lending to protect against Brexit aftershocks.

In its financial stability report, published today, the Bank says current housing market health is hard to judge due to the distorting effects of the March rush to avoid the rise in stamp duty.

But it says: “Nevertheless, the Royal Institution of Chartered Surveyors survey showed that expectations of housing market activity and price growth slowed sharply in May. New buyer enquiries in May were at the lowest level since 2008.”

The report says vulnerable households are a possible risk to the health of the UK economy.

It argues restrictions imposed by the Financial Policy Committee on mortgage underwriting have curbed levels of UK household debt.

But it adds: “However, the ability of some households to service their debts would be challenged by a period of weaker employment and income growth.

“These vulnerable households could affect broader economic activity by cutting back sharply on expenditure in order to continue to service debts.”

The report adds the Bank is also worried the actions of buy-to-let investors could harm the economy.

It says buy-to-let landlords had the potential to “behave procyclically, amplifying movements in the housing market”.

The central bank says it will keep monitoring the behaviour of buy-to-let investors to protect against future economic shocks.

Speaking in a press conference after the report was published, Bank governor Mark Carney said 2014 stress tests had given him confidence about the risks of buy-to-let.

The Bank has also moved to relax the requirements around the amount of capital banks have to hold.

In March the Bank said its counter-cyclical capital buffer, the amount held in reserve by banks which can be deployed in a downturn. would rise to 0.5 per cent. But today it axed that decision, cutting the rate to 0 per cent with immediate effect.

It plans to keep this in place until at least June 2017.

The Bank also says Brexit economic risks have already “begun to crystallise”.

It says: “The current outlook for UK financial stability is challenging.

“There will be a period of uncertainty and adjustment following the result of the referendum. It will take time for the UK to establish new relationships with the European Union and the rest of the world. Some market and economic volatility is to be expected as this process unfolds.”

In the press conference, Carney said his message to UK homeowners was to be cautious, but that he “would also say that in the 10th year of a boom”.

He said: “We would advise people to be prudent. If you’re taking out a mortgage, at some point over the point of that mortgage times will be difficult. You want to be able to service that over the time of the loan.”

Carney added: “Today’s actions mean those UK households and businesses that want to seize valuable opportunities in a post-referendum world can be confident that they can be supported by the financial system.

“The banks and building societies are up and running. They are open, and credit is available for people that want it. We are in a very different world to 2007.”

In the press conference, Carney also said the FPC was still considering the consequences of changing interest rates.

The Bank has also promised further intervention if needed.

It’s report says: “The FPC stands ready to take actions that will ensure that capital and liquidity buffers can be drawn on as needed, to support the supply of credit and in support of market functioning.”