Thursday, 28 November 2013

Carney calls time on cheap lending scheme

Housebuilders' shares fell by up to 8% from mid-morning as Bank of England governor Mark Carney signalled a fundamental shift from January in the Funding for Lending Scheme, away from supporting mortgage lending towards business funding. Although most of the strong performance in the housing market this year has been put down to the introduction and then expansion of Help to Buy, at least the initial stimulus came from FLS by which the BoE provided up to £60bn for banks, to be passed on in readier lending to households and businesses.

Carney said: "Since the FLS was launched [last year] it has contributed to a substantial fall in bank funding cost, this has fed through to a significant improvement in household credit conditions. Given this success there is no longer a need for FLS to provide further broad support to household lending".

The big question is how this leaves the outlook for both phases of the Help to Buy scheme, equity loans for new homes and, more recently, government guarantees for up to 95% mortgages on all homes. Phase 1 has been very successful, being involved in around a third of all new home sales, but Phase 2 has been widely forecast to risk stoking a bubble.

In recent weeks Carney there has been a reported widening rift between Carney and the Treasury over both the effectiveness of H2B and the BoE's powers to influence its scope (see Briefing). According to reports today, Carney's press conference comments have been supportive on a short-term basis but non-committal more than a year out and indicated the Bank could get more interventionist on loan-to-value and other affordability criteria (the opposite to government measures to support 95% mortgages). 

An even bigger elephant in the room is what this toughening in stance, and Carney's propensity to spring surprises, suggests about the future deliberations on rate setting by the Monetary Policy Committee, which he chairs. More lending to smaller businesses should translate into greater employment growth, which could hasten the fall to 7% unemployment - the highest profile but not exclusive trigger for rates rises. A portent was a further rise in Sterling today.

Carney's surprise ("but not shock", Council of Mortgage Lenders) move indicates he does see signs developing of a bubble; the likely outlook for housing market funding, either through monetary or government stimuli, is getting tighter.

•  By contrast share in Aim-listed Sigma Capital Group, a housing and urban regeneration specialist, soared by 54% on the announcement of a potentially £700m deal to build up to 6,600 homes for private rent. Build to Rent has been painfully slow to get off the ground, but this move suggests that an alternative route to expanding housing supply may be gaining momentum.

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