Bank of England Governor, Mark Carney, warned in an interview with Sky News yesterday that the biggest risk to the UK economy lay in excess borrowing triggered by rising house prices. Somewhat counter intuitively, that’s potentially quite good news for home owners in Scotland.
How so? Firstly, his immediate solutions to the problem suggest that the Bank is unlikely to use interest rates as a means to control house prices. That should mean that interest rates remain low. Secondly, some of his suggested solutions, notably seeking to limit the size of mortgages relative to incomes, are less likely to affect Scotland than many areas of the south. That is just as it should be given that – if there is a house price bubble – it is largely limited to London and the Home counties.
Mr Carney told Dermot Murnaghan that: “We don’t want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term……We would be concerned if there were a rapid increase in high loan to value mortgages across the banks … we’ve seen that creeping up and it’s something we’re watching closely.”
So, his concern is that buyers will borrow more than they can afford and that banks will lend more than is safe.
His potential solutions to preventing that are focused on setting tougher hurdles for mortgage lending and advising the government to limit the scope of Help to Buy. During the interview, he suggested that the Bank could “Take steps around affordability to test whether or not individuals can repay mortgages at much higher interest rates. And that it could “Limit amounts of certain types of mortgages that banks could undertake.” As well as recommending a change to the terms of Help to Buy.
He did not say for certain that the Bank would do any of these things, but described them as possibilities.
The most important conclusion to draw from this is that the Bank is looking for tools other than interest rates to limit mortgage borrowing. The MPC (Monetary Policy Committee) is only too aware that the UK is emerging from a long and hard recession. It does not want to impose additional costs on business and greater strain on personal finances by raising interest rates by more than is absolutely necessary. In other words, interest rates are likely to remain low (even if they rise somewhat next year) for some time to come.
But if the Bank does use some of the tools Mr Carney referred to, the chances are that they will have a greater impact in the south than they will here. Take Help to Buy, for example – the mortgage guarantee version, not the one limited to new build homes which is in the gift of the Scottish government. One obvious change would be to limit the maximum price of a property that could be purchased using the scheme. Given that prices in Scotland are much lower than elsewhere, reducing the ceiling from the current £600,000 to say £300,000 would have almost no effect at all.
Introducing rules to limit lending of high loan to value mortgages is also likely to have a smaller impact in Scotland than elsewhere. Scots have been traditionally more cautious about buying property. According to data from the Halifax (opens as a spreadsheet) the ratio of house prices to incomes is lower in Scotland than anywhere else in the UK. On average, house prices here are 3.6 times earnings. For the UK as a whole, house prices are 4.77 times earnings and in London, they are 6.36 times earnings.
For that reason, mortgage payments in Scotland consume less of our pay packets than elsewhere in the UK. Halifax calculates that mortgage payments north of the border represent 18.9% of pay packets. The equivalent figure for the rest of the UK is 27.6% of incomes and in London that rises to 39.1%.
In other words, moves by the Bank to limit riskier mortgage lending to those buying property at many times a multiple of their income and where the repayments will consume a large proportion of their income are likely to have a greater impact in the south.
That said, I hope the Bank does not recommend the abolition of Help to Buy entirely. There is a risk that, without it, the market will be left to those with the family resources to amass a large enough deposit to qualify for a mortgage, effectively excluding those from less prosperous backgrounds.