MNI ANALYSIS: BOE Competition Push Blunts Policy Transmission

--New Entrants Have Kept Mortgage Lending Rates Down

By Jai Lakhani and David Robinson

     LONDON (MNI) - Bank of England efforts to boost mortgage market competition

have hampered the transmission of monetary policy, as lenders take advantage of

cheap central bank funding to keep loan rates down at a time when curbs on

over-extended borrowers have depressed house-price growth in pricier regions.

     The BOE's Monetary Policy Committee (MPC) has hiked its benchmark Bank Rate

twice, by 50 basis points (bps) in total, since last November, but many mortgage

holders have seen borrowing costs go down, rather than up.

     "Many households... will have felt no effect of those two rate rises at

all, so far. If you are a mortgage holder who fixed your mortgage three years

ago, or five years ago, and you are re-fixing today, it is almost certainly at a

lower rate than you last fixed at," BOE Chief Economist Andrew Haldane said at a

recent Institute for Government event.

     --MORTGAGE MARKET COMPETITION

     MNI analysis highlights a number of reasons for this. In recent years, the

bank has encouraged new entrants into the mortgage market, and the resultant

greater competition, together with the BOE's provision of cheap funding via the

Funding for Lending and Term Funding Schemes, has helped keep a lid on lending

rates. Weak demand from home buyers, on the back of feeble household income

growth, has also crimped lenders' ability to charge more.

     The BOE's Quoted Rates data, which shows average interest rates on 'shop

window' mortgages, underscores Haldane's point. In August, an average 75%

loan-to-value (LTV) three-year fixed-rate loan was offered at 1.82%. Back in

August 2015, a mortgage on the same terms was available at 2.55%, implying that

borrowing costs have fallen by 73bps for those recently renewing their

fixed-rate mortgages.

     Since November 2017, the average interest rate on three-year 75% LTV

mortgages has risen, but only by 14bps compared with the 50bps rise in Bank

Rate. The last time the MPC tightened by 50bps, back in 2007, the average

interest rate on three-year 75% LTV mortgages rose by 73bps (more than five

times the rise in 2017).

     While the end of cheap financing provision earlier this year should

eventually remove one factor hampering the pass-through of higher interest

rates, a pick-up in mortgage demand is also crucial if higher BOE interest rates

are to be more fully reflected in the cost of mortgages.

     --LENDING CAP

     But other rules imposed by the Bank, including a cap on loans financial

institutions can make to buyers seeking to borrow at high multiples to their

income, have constrained the housing market. In particular, the stipulation that

loans made at loan-to-income ratios of 4.5 times or greater must not constitute

more than 15% of new mortgage voume has blunted the benefits of lenders' cheaper

funding in London and surrounding regions, where house prices are higher.

     The London market has also had to contend with concern over Brexit, which

has frightened away some foreign buyers.

     London, the South East and the East have seen house price growth fall back

sharply over the past year compared to 2010-2017 average growth rates. Consumers

in these regions (especially first-time buyers) likely face affordability

constraints, including costlier high-LTI mortgage rates.

     While average house prices increased by 3.1% y/y in July, it was the lowest

annual rate since August 2013, and London drove the overall slowdown. Prices in

the capital declined by 0.7% - the weakest performance since September 2009.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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