While much has been made of IMF managing director Christine Lagarde’s comments on the potential for a house price crash should the UK exit the European Union after a referendum next month, a surprisingly small amount of news coverage has been given to additional IMF comments on the UK’s mortgage rules.
The IMF’s staff report on the UK did, of course give a great amount of detail and discussion to the upcoming EU referendum and the potential results of a Brexit. It also, however, mentioned that the UK’s mortgage lending rules may well need to be tightened – quickly – in order to prevent a housing market crisis.
“More recently, … house price growth rose to more than three times income growth, and the share of new mortgages at high loan-to-income (LTI) ratios is again rising,” the IMF staff report said. “If current housing and mortgage market trends persist, further macroprudential tightening (e.g., tighter LTI or loan-to-value limits) will be needed later this year to avoid financial stability risks that may arise from excessive household indebtedness.”
Of course, the IMF isn’t the first institute to mention the UK’s mortgage rules. The Bank of England’s (BOE) Prudential Regulatory Authority (PRA) has recently recommended in an assessment it has done of the Buy-to-Let mortgage lending market that tougher stress test with a higher mortgage interest rate were used by the UK’s mortgage underwriters. The key differences are that the IMF is a global institution and that it considers the whole mortgage market to be in need of tighter lending criteria, not just BTL, Commercial or Residential Lending.
The IMF report does also identify that the UK’s housing market may not remain as buoyant as it is now, with the stamp duty land tax increases for landlords likely the cause for some of the recent strong gains in house prices and purchasing activity. However, that doesn’t really account for increased loan-to-value and loan-to-income increases, particularly among residential mortgages. That means that the whole mortgage market will likely be under close scrutiny from the PRA, the BOE and the Financial Policy Committee (FPC).
This could result in a little self-regulation which would see lenders being a little stricter with their underwriting. Or, it could mean more regulation for the UK’s already under-fire mortgage market and a fresh reason for some downward pressure on house prices.
Indeed, could the IMF’s comments come as new London Mayor Sadiq Khan is attempting to plan how he can tackle the lack of affordable housing in his city. For many Londoners this is a crisis, but, for other Britons, being priced out of the local housing market is more common than you might think. Is now the time the UK’s housing market was taken in hand, that more land is made available at more reasonable prices and that hard-working families across the whole of the UK have a genuine chance to buy a home? Or, is it just another warning that will receive little more than lip-service and prices will continue moving higher?