Mark Carney announces new affordability tests

The Bank of England has announced new measures aimed at cooling the housing market in an effort to stave off another financial crisis. Mark Carney has said that the bank will restrict lending to some buyers who they believe are over stretching themselves and are likely to experience financial difficulties when interest rates start to rise. The news has been welcomed by economists who have been concerned at the level of house price increases particularly across London and the south-east.

The bank have had to perform a balancing act and has so far refused to raise interest rates to calm the property market because it believes that this would have a detrimental effect on the economic recovery. These new measures are seen as a way of reducing the demand from buyers which should reduce the level of price increases.

Two new rules introduced

The bank has introduced two new rules that will reduce the income to ratio levels that borrowers can access. The new rules mean that fewer borrowers will be able to get loans to income ratios of above 4.5. Banks and building societies will be limited to the number of these types of loans that they can issue and these loans must only make up to 15% of their total mortgage book.

This should reduce the chance of the banks getting into trouble again by issuing risky loans and therefore avoiding a repeat of the sub-prime mortgages fiasco. The Bank of England has also said tat they have issued a new affordability test that banks and building societies will have to use for new loans. Any new mortgages that are issued have to be able to afford there mortgage payments if interest rates rise 3% higher than today.

Doubt has already been cast that these new rules will affect the housing boom that we are experiencing with many believing that the new rules will do nothing to cool the market because there will still be too many buyers that these new rules will not affect. The new rules were shrugged of by the stock market and housebuilders saw there share prices rise as brokers took the view that the new measures were just talk and were not going to do much to stop the booming market from continuing.

Two of the UK’s biggest builders, Persimmon, and Barratt were amongst the fastest risers in the market and is an indication that is business as usual in the housing market and that the stock market is pricing in further profits for house builders.