In reality however we have a two or three tier market and all the overheating is happening in London, although this does now show signs of spreading to the South East.
Typically we have been used to interest rates being enlisted to put the brakes on escalating house prices. But this becomes much more difficult when the only unreasonable acceleration of prices is in one area of the country and a rise in rates may well damage the other areas.
Bank of England governor Mark Carney has suggested interest rate rises may be some way off, saying there is still slack in economy that needs to be absorbed before a rise is considered. However Ian McCafferty, a member of the Bank’s Monetary Policy Committee, has said we are getting closer to the point when rates will rise.
However he said interest rates were a ‘blunt tool’ so it preferred the Bank’s Financial Policy Committee (FPC) to use new measures that have been given to it first.
Capping LTVs could be another option; however this is unlikely to slow the market in London enough as buyers here are usually either cash buyers or provide higher deposits than those affected by any capped LTV.
The other hot topic at the moment is loan to income ratios (LTIs). LTIs have risen, especially for high-value properties, so this possibly is where the FPC will start in order to tackle the current situation with London’s mortgage market.
Despite this appearing to fly in the face of the MMR which introduced affordability based measures rather than income multiples, Lloyds has already announced it will also restrict mortgage lending to four times income on loans over £500,000.
Another tool available to the FPC is to increase lender capital requirements and impose extra requirements on specific lending areas. However, this would mean lenders were left to judge how best to cut back which could create a patchwork of restrictions from lender to lender which may not have a concerted effect in one area.
The FPC is an unknown quantity and the measures are all relatively new to the market so their potential impact is, as yet, unknown. Maybe the biggest way to halt the rise of the London market would be an extension of measures to levy capital gains tax on cash and overseas buyers.
David Copland is director of mortgage services at LSL
