BoE pulls plug on cheap state loans to banks to avoid housing crash

The Bank of England has announced that it will pull the plug on the Funding for Lending scheme in January 2014.

The central bank said that the measure, ending cheap state loans to banks in exchange for increased consumer lending, is aimed at clamping down on rising house prices and household indebtness.

Defending the sudden U-turn, Bank of England governor Mark Carney said: "We did not see an immediate threat coming from the housing market, but we are concerned about the prospective evolution of that market in the absence of some of these changes.

"The history of housing cycles in this country and in others is that we do see instances where momentum develops, underwriting standards slip and extrapolative expectations develop amongst bankers as well as households, as well as borrowers.

"People think prices are going to continue to go up and they stretch and justify their actions on the basis of those assumptions. Ultimately those assumptions are proven false and you end up with a recession that is much deeper."

Carney warned that, left unchecked, ballooning house prices could lead to a much deeper recession.

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He said: "Recessions associated with housing crashes are, on average, three times as deep as your average recession, so the concern is where this could go.

"We definitely see short term momentum and we’re starting from relatively high levels of valuation and indebtness in households."

The move represents a significant change in policy for the central bank and may come as an embarrassment to Chancellor George Osborne, who is currently trying to stimulate the housing market with the Treasury’s Help to Buy scheme.

Funding for Lending will still be available but is to be refocused on lending to small businesses.

Osborne said: "Now that the housing market is starting to pick up, it is right that we focus the scheme’s firepower on small businesses.

"Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focusing the Funding for Lending scheme to support them."

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