After the 2007/08 financial crisis the UK government set up a committee to consider what if any additional tools the Bank of England could use if a similar event was to occur in the future. As the financial crisis was based upon the mortgage sector, initially in the US then spreading across the world, there has been much speculation about what other type of tools the Bank of England is after. Now, as the UK property market continues to push further ahead and the economy gains strength the Bank of England has finally broken cover and requested a more hands-on approach to the UK property market.
What would the Bank of England like to do?
Interestingly the Bank of England has requested the legal authority to control the size of mortgages agreed by limiting loan to value and loan to income ratios. In simple terms this would allow the Bank of England to control the UK mortgage market using direct measures of which there would be no grey areas and no room for manoeuvre. The simple idea would be to reduce the leverage available to UK investors and homeowners to ensure that in the event of a future financial “episode” the situation would not be exacerbated due to a squeeze in liquidity.
If you take a step back and look at the situation from a distance, this does seem to make perfect sense, ensuring that only affordable mortgages are agreed thereby reducing the size and depth of any future dips in the property market.
Quote from PropertyForum.com: “The Labour Party this week announced plans for a mansion tax in the UK which would see an additional tax on properties worth in excess of £2 million.”
Are these tools compatible with an open market?
The UK economy and the UK investment arena is in effect a free open market with a variety of regulatory structures which do not directly impinge the running of the economy or investment arena. There are many investors who will be against overly strict regulation controlled by the Bank of England because this then prompts the question of potential political interference, despite the fact that the Bank of England is independent from the government of the day.
In theory there is no reason why anybody would disagree with the tools that the Bank of England has requested, they would only be used in extreme circumstances and could really help to avoid a total meltdown of the property and mortgage sectors. Whether or not the Bank of England will be afforded these tools in the future remains to be seen but there is no doubt that governments are keen, at this moment in time, to reduce the chances of a repeat of the 2007/08 financial crisis in the longer term.
The buy to let market included
Historically the buy to let market has remained pretty much separate from the traditional UK home buyer market. However, the Bank of England does intend to use the tools in question to control the buy to let market which itself can have a major impact upon the real estate sector.
It is no secret that many buy to let investors have leveraged themselves beyond all traditional ratios taking in their income and therefore moving to an overdependence upon property prices to fund their future growth. Again, it does make sense for the Bank of England to have such controls but will UK and worldwide investors appreciate the Bank of England using these tools even if only in extreme circumstances?