Bank of England governor Mark Carney has been in the hot seat for more than two years and during that time has had an immense impact on the mortgage market.
Arriving from Canada on 1 July 2013, he was regarded as the global film star of British central banking – the so-called George Clooney of monetary policy. His was the expensive foreign signing more associated with Premiership football than with national economic policy.
The Canadian became the most powerful unelected official in Britain with control of prudential policy, financial stability, monetary policy and financial regulation.
Two years on and Carney has made a number of big calls affecting the mortgage sector. Critics cite a confusing message on rate rises while others hail his foresight in halting a housing bubble.
As a monetary dove, the governor has held Bank rate at 0.5 per cent and signalled it will rise only gradually, to the consternation of savers and pensioners but the joy of mortgage holders.
He has curbed mortgage lending and wants powers to contain buy-to-let but has waved through Government schemes to boost homeownership, such as Help to Buy. He pulled the emergency Funding for Lending Scheme for mortgages in January 2014 while overseeing huge growth in lending volumes. He has come under political fire for “punishing” savers and still faces the major headache of unwinding quantitative easing.
The governor’s sweeping powers enable him to influence mortgage lending in many areas and Carney’s decisions during his remaining two-and-a-half years in the role will be crucial.
Just six months in to the job, Carney unveiled his set-piece policy shift to create forward guidance on monetary policy and interest rates. This was billed as providing useful indicators to the path of interest rates so that businesses and mortgage holders could have greater certainty in their financial planning.
In November 2013, the governor announced that UK interest rates would not rise until unemployment fell below 7 per cent; the figure was at a stubbornly high 8 per cent. This was intended to repurpose monetary policy away from focusing merely on inflation to serving economic policy in the round.
Many regarded the 7 per cent figure as the trigger for a rate rise but Carney said he would consider other economic data as well.
No sooner had forward guidance been unveiled than unemployment plummeted, with millions of jobs created in the past 18 months. As employment boomed, Carney was forced into an embarrassing U-turn just three months in to his new policy. He reworked forward guidance in February 2014 to make interest rate rises dependent on a series of economic indicators rather than on unemployment alone.
As it became clear that Carney had no intention of raising rates if unemployment were to fall below 7 per cent, detractors said the new forward guidance smacked of desperation to switch from a failing policy to one that might work.
Carney has also come under fire for his confusing public messages on when interest rates may rise. Your Mortgage Decisions director Dominik Lipnicki thinks the governor’s speculation on the timing of rate rises is unhelpful.
“He says one thing one day and something different the next,” he says. “It’s good to prepare people for when rates go up but it wasn’t long ago he was saying this year and now he says next year.
“Unless they really know what they are saying, I don’t think speculation is healthy,” he adds. “Someone in Carney’s position should only come out and speak when he is really sure. It’s like football transfers: you can read what you like in the newspapers but when the BBC comes out with it then you trust there is substance to it. The market reacts to what Carney says.”
Emba Group director Mike Fitzgerald says he is recommending five-year fixed-rate mortgages ahead of an expected rate rise.
“You look at two- or three-year fixed rates and they are so cheap at the moment. But you know by the time you come off them it will be a higher rate,” he says.
“We look at indicators about when rates will rise and it is getting closer and closer. It is going to be either the end of this year or the beginning of next; it has to happen. We suggest that our crystal ball is no better than his but a five-year fixed provides some security to get ready for a rate shock in five years’ time.”
Moneysupermarket consumer expert Dan Plant agrees that it is crucial for borrowers to plan now for a rate rise because rates could rise in the run-up to the announcement.
“Fervour about a potential rate rise is likely to make lenders jittery and we could see them pricing this in to their available deals soon,” he says.
Fitzgerald thinks Carney’s management of borrowers’ expectations is “marvellous” because he explains potential rate rises in a way ordinary people can understand.
“If I stopped 100 people in the high street now, they would say they’re rising soon but they don’t know when exactly,” he says. “People are curtailing some expenditure to get ready for it.
“Borrowers are also paying off more of their mortgage within their redemption penalty.”
An Emba Group survey of its clients showed a big increase in the number of borrowers paying off sums without penalties.
“They know rates are going up and Carney has done a good job of it,” says Fitzgerald. “[Many of us] lived through times [in the early 1990s] when they went up to 10 per cent and 15 per cent in one day but now we have professionals running it. It’s good for the housing market.”
Banking consultant Mehrdad Yousefi says Carney has done a great job of managing the impact of his policy developments. He thinks the governor has faced unfair criticism from the media and commentators when in fact he has been doing well.
“He is always nine months to a year ahead of his predecessor,” he says. “In the past few weeks, he has told the fund management industry to expect an outflow from retail funds when rates rise. It is unheard of to have a governor with the foresight to explain how policy dynamics will impact them.
“He has done more than guidance by warning UK businesses about the impact on their business models. I think he has an excellent job in psychology.”
Carney has also been censured by some for keeping interest rates low for such a long period, being accused of punishing savers and damaging the economy.
In November 2013, just days after the governor had introduced his forward guidance, former Conservative prime minister John Major said interest rates should be increased to 5 per cent.
The UK Independence Party has also queried whether rates should rise, despite ongoing low inflation. Ukip economic spokesman Mark Reckless said: “A modest rise in interest rates now may help forestall larger rises later and so, ultimately, could protect mortgage holders.
“Meanwhile, pensioners and those on fixed incomes have been squeezed for too long, while banks have failed to allocate capital to more productive uses. Ukip believes that low inflation at the moment is not a good excuse to keep interest rates continually at crisis levels.”
A member of the BoE’s Monetary Policy Committee (the nine-member group tasked with setting UK interest rates) has also warned that rates must rise “well before” inflation hits 2 per cent. Writing in the Daily Telegraph last month, Kristin Forbes said: “An increase in interest rates is generally believed to take from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions.”
Carney faces yet more pressure from Labour leadership frontrunner Jeremy Corbyn, who is demanding the scrapping of BoE independence.
Alongside his key economic adviser, Richard Murphy, Corbyn is calling for another round of quantitative easing to fund infrastructure projects. This would see the Bank print money to buy bonds in a National Infrastructure Bank that would not need to be repaid. The infrastructure bank would build publicly owned roads and homes.
However, Yousefi says rather than launching more QE, the biggest challenge facing the Bank over the next few decades will come from unwinding QE. “It’s a 10- to 15-year journey,” he says.
In June 2014 the Financial Policy Committee (the BoE group tasked with ensuring financial stability) made two major recommendations designed to constrain the mortgage market, alongside the introduction by the FCA of the Mortgage Market Review in April.
First, lenders were obliged to apply stress tests to borrowers to ensure they would be able to make their loan repayments at any time in the first five years if interest rates were to rise by 3 per cent.
Second, the FCA and Prudential Regulatory Authority had to ensure that all lenders of more than £100m a year could lend 4.5 times income only for a maximum of 15 per cent of their loans.
In January 2015, Barclays imposed a 4.5 times loan-to-income cap on all its lending, down from 5.5 times income.
“It is a very simplistic way of looking at lending,” says Lipnicki.
“Carney wants to ensure it is affordable when rates go up but we need to look beyond that at interest-only lending into retirement, which makes it difficult for many people to get a mortgage. Mortgage prisoners are a massive issue and this makes it worse, without a doubt.”
London & Country associate director of communications David Hollingworth says that when the FPC made its recommendations, it was basing them on the booming mortgage market of spring 2014. That market has slowed in the past 15 months as the MMR has kicked in, he observes.
“It showed the FPC was ready to act if the market had the potential to run too quickly,” says Hollingworth. “It was a safety break, or belt and braces.”
He adds: “You have seen lenders adjust to the rules. Affordability is the primary test: if you have someone who sails through, there is no maximum multiple. In my eyes, it should be five times income.”
Carney’s next big task on mortgages is the buy-to-let market, whose rapid growth has led him to express alarm. Council of Mortgage Lenders latest data shows buy-to-let lending grew year-on-year in June by 54.5 per cent.
The Treasury is consulting on whether to hand the FPC the power of direction to limit residential mortgage lending at high loan-to-value or debt-to-income ratios, including interest coverage ratios for buy-to-let lending.
This would constitute the first prudential regulation of the buy-to-let sector, which has long avoided conduct regulation because it is deemed an investment product. The sector is now viewed as a risk to financial stability.
BoE data from the FPC’s meeting in June shows buy-to-let made up 15 per cent of the stock of outstanding mortgages and nearly 20 per cent of the flow of new mortgage lending in the first quarter of 2015.
Meanwhile, the number of buy-to-let products at an LTV ratio above 80 per cent was 50 per cent higher than 18 months ago.
The minutes of the meeting say: “The committee noted that its actions to insure against future risks applied only to the owner-occupied segment of the housing market and, given this asymmetry, it was possible for risks to financial stability to be transferred to the buy-to-let segment.”
Separate from the Treasury consultation, the FPC has asked the BoE to prepare further information on buy-to-let ahead of its September meeting. It wants the Bank to provide more data, identify and quantify channels through which buy-to-let could threaten financial stability, and determine what regulatory tools might be used.
The study will range from potential losses on buy-to-let loans to the wider impact of increased indebtedness on the macro-economy.
With buy-to-let lending firmly on Carney’s radar alongside other measures designed to affect mortgages – from rates to LTI caps – the governor will continue to have a huge impact on the sector during the remainder of his term.
Carney’s big mortgage calls
November 2013: Forward guidance
This set out a plan not to raise interest rates until unemployment fell below 7 per cent, with the idea of breeding more certainty in monetary policy.
January 2014: End of the FLS scheme for mortgages
Designed by his predecessor, Mervyn King, the Funding for Lending Scheme was credited with reviving the mortgage market but Carney decided it had served its purpose. He hoped its termination would remove some heat from a recovering market.
February 2014: Reworking forward guidance
After unemployment fell more quickly than anticipated, Carney reworked his forward guidance. He set out a series of economic indicators to judge when rates would rise, with unemployment reduced to just one of them
June 2014: LTI cap of 4.5 times
This LTI cap on a maximum of 15 per cent of bank lending, plus a stress test of 3 per cent interest rates on all borrowers, was a sign that Carney was prepared to intervene directly to stop the housing market from over-heating.
Autumn 2015: Buy-to-let action
The FPC and Treasury are both reviewing the impact of buy-to-let lending on financial stability, with separate reviews slated this year. These could hand the FPC the power to limit buy-to-let mortgage sales.
January 2016? First rate increase since March 2009?
Carney’s biggest decision will be the timing of the first rate rise in nearly seven years. He has indicated it will be early in 2016 but the market expects it in the next few months
Bernard Clarke, spokesman at the CML
Predictions on the timing of an eventual rise in Bank rate appear to ebb and flow with the publication of each new economic indicator.
In July, the Bank was widely reported to be signalling a rate increase around the turn of the year. More recently, falling oil prices and stockmarkets and a more subdued outlook for inflation have led commentators to revise their predictions back to the middle of 2016. Views on the timing of the first rate movement may have changed again by the time you read this.
It is logical, of course, for opinions to change as the economic backdrop shifts. As Keynes reportedly said: “When the facts change, I change my mind.”
Generally, however, the Bank’s messaging about rate rises has been helpful in at least two ways. First, it has helped reinforce in the minds of consumers an uncomfortable truth that might otherwise slip from their minds – namely, that rates are abnormally low and must rise in the future.
In that sense, a succession of reports speculating that the likelihood of a rate rise has receded or moved closer may have helped to reinforce the key message for consumers that the direction of rates will be upwards.
The second helpful message is about the movement of rates once they start to rise. The Bank has repeatedly said that rates will increase in a series of gentle, measured steps, taking into account the capacity of households to adjust to higher debt-serving costs.
More recently, the Bank has indicated that, following a period of small increases, official rates may peak at a little above 2 per cent – or around half their historical norm since the Bank was formed more than 320 years ago.
All of this has reinforced a clear message for consumers that rates are going to rise, while at the same time reassuring markets about the trajectory of rate movements. This has helped sustain the confidence of both households and lenders.
More generally, the Bank’s measures in the aftermath of the financial crisis have helped to maintain the availability of credit, to reinforce macro-prudential stability and to shape policies such as Help to Buy that have brought confidence to the housing market.
Of course, there are some concerns for lenders, including the cumulative effects of extended regulatory powers and the impact of measures on some areas of activity.
So, in response to the consultation on new powers for the FPC to limit higher-LTI lending, we argued that there could be a disproportionate impact on firms that specialise in lending to high-net-worth customers. In doing so, we were able to identify areas where modification of the proposals was appropriate.
We have also argued that the FPC does not need powers of direction over the market because it can achieve its aim through recommendations.
And we believe that any proposed new powers to regulate the buy-to-let market should be considered alongside the impact of fiscal measures announced by the Chancellor in his July Budget.
Toni Smith, sales operations director of First Complete
Mark Carney is very influential but, arguably, the Chancellor is more so and with the FCA and PRA also making decisions that affect the housing market, the outcome cannot be assessed in isolation.
It was right to stop the Funding for Lending Scheme for mortgages. It had served its purpose of getting banks lending again, both to individuals and to companies, but it is better when the market is allowed to operate without artificial stimulus or interference.
However, I struggle with the introduction of the debt-to-income cap on lending. The MMR had been implemented only two months earlier when the PRA introduced more new measures, which appeared to fly in the face of the affordability assessments that the MMR was designed to put in place.
Basic economic rules typically say that, after putting a measure in place, you need to give it time to take effect to see how well it works before making further changes.
In fact, the housing market has been influenced by so many new initiatives and interventions over the past 18 months that it is difficult to decide which ones have been truly effective and which ones have not.
Since the beginning of last year we have been bombarded with three-letter acronyms: Help to Buy 1, to increase housing stock; Help to Buy 2, which helps people to buy but does nothing to increase housing supply and therefore arguably has an inflationary effect on the market; FLS; MMR; capital adequacy; debt-to-income; the slightly older New Buy and Right to Buy schemes; Help to Buy Isas; and now the impending Mortgage Credit Directive. And somewhere along the line George Osborne introduced major changes to stamp duty.
With all of these measures playing out as well as the wider economic factors, forward guidance was always going to be a challenge. There is some sense in preparing people who have never experienced a base rate rise for the fact that one is approaching but there is too much press coverage around this area, a lot of it inaccurate.
We now have a pretty secure financial structure in the UK but we could do with fewer interventions in the market, some of which seem to be accelerating it while others are simultaneously applying the brakes.