Yesterday the Bank of England and HM Treasury announced that they would ‘re-focus’ the Funding for Lending Scheme (FLS) away from mortgages and towards business lending.
This announcement has been seen as a move to stop another house price bubble forming, but may in fact just be halting the further expansion of a bubble that never properly deflated in the first place.
This of course is a bit of a balancing act because although many stakeholders want rampant house prices (owners, estate agents etc), there are many people who don’t or might even like to see a bit of a reverse (renters, first time buyers etc). But those with interests in property are desperate to ensure prices do not start falling – bad for owners, politicians and bank balance sheets.
The Council of Mortgage Lenders is obviously happy that its members can now keep the market (bubble) in the right place without FLS and, by their actions, both the Treasury and BoE must be happy too.
The CML said that these changes to the FLS reflect the improvement in funding market conditions that has been experienced in recent months with CML director general Paul Smee observing:
"Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust."
The TUC approves of this ‘re-focussing’ on economic grounds but thinks that cooling the housing market may cost the government politically in the run up to the election in 2015.
TUC General Secretary Frances O'Grady said:
"This is good news for the real economy, but bad news for the Chancellor.
"The Bank of England is clearly worried that the economic recovery is based on consumers borrowing on the back of rising house prices rather than business investment and rising exports.
"Ensuring that funding for lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feel-good factor that the Chancellor is hoping will distract from the failure of government policy to rebalance the economy."
If that is the case then surely the Chancellor has shown that he is not motivated by short term political gain? What is the TUC saying?
The EY ITEM Club points out that lending data released today shows how well timed the announcement is.
Carl Astorri, senior economic adviser to the EY ITEM Club, said:
“Today’s lending figures for October highlight the success of the government’s Help to Buy and FLS schemes in greasing the wheels of the housing market, and the UK consumer in general. Mortgage approvals rose to their highest level since March 2008, which helps to explain the continued strengthening of the housing market in recent months.
“Unsecured lending, while rising on the month, did so at a more subdued pace. But more disappointing was a further decline in lending to SMEs, which declined by around £500m on the month. The numbers suggest that, despite the medium-term risk of a housing bubble, banks are much more willing to take a punt on the housing market than on SMEs, and this is consistent with the consumer driven growth that has stylised recent UK output growth.
“We believe that for robust UK growth to be sustained over the next couple of years, growth needs to broaden out beyond the consumer. The weakness in lending to SMEs, and the acceleration in mortgage approvals and house prices, suggests that yesterday’s announcement of a reorientation of the FLS scheme from the consumer to businesses was well-timed and appropriate. The change in policy direction should help to get the UK growth engine firing on all cylinders, as well as decrease the risk of a housing bubble developing over the medium term.”
For the future good of the country let’s hope the balancing act works and that the FLS money redirected into business will promote the required growth in the economy, employment and wages so that, over time, the average person on an average wage can afford an average house. Now wouldn't that be nice?