Many believe, though this is not uncontested, that the UK has a housing crisis. But there is less agreement about how this crisis might be resolved, not least due to a lack of clarity about what would constitute a well-functioning housing system. We have no settled metrics for concluding that the crisis has been solved (or alleviated). But we do have a sense that there are certain groups and geographies which are particularly affected. The FPC sits within the intersection between housing policy and macroeconomic policy. Its decisions may also have distributional impacts.
The present policies of the FPC, and the FPC’s commentary on their effects, run two risks. One is of creating excessive expectations of their likely success, especially in times of housing market volatility when ‘fine-tuning’ the tools may well not be practically possible. (Brener, 2020). The other is of losing political credibility if the distributional effects of its stance are not fully acknowledged.
Some background. In April 2015, the FPC was granted powers of Direction with regard to owner-occupied lending in relation to loan-to-value (LTV) and debt-to-income (LTI) limits. In late 2016 the FPC was also granted powers over loan-to-value and interest coverage ratios in respect of buy-to-let (BTL) lending. The FPC is clear about the purpose of these policies – which is to reduce the risk of financial crises stemming from lenders with risky mortgage portfolios and/or households with high debt-to-income ratios. In addition, the FPC seeks to moderate the self-reinforcing loops which can arise between house price expectation and lender/borrower behaviour.
Written for the Macroprudential Matters website, proudly managed by the Qatar Centre for Global Banking and Finance at King’s Business School. Read the rest of the article here.