What’s our role in the housing market?
The Bank of England needs to know about, understand and predict changes in the housing market. This is to keep an eye on risks to the economy and the financial system and to judge the impact of our policies.
Our role in the housing market covers a few areas – for example, we set the interest rate, which impacts the cost of getting a mortgage. We also make sure banks are able to meet potential losses on their mortgage lending. This means you can save and borrow money safely. Last but not least, we process big payments like buying a house.
Why is the Bank interested in the housing market?
House prices and the number of sales impact how much money people have to spend. Household spending accounts for two thirds of Britain’s economic activity, and so any change is likely to affect the rest of the economy. Observing the housing market helps us to assess the overall demand for goods and services.
Mortgages are the largest debt for households. When many households have large amounts of debt, consumption growth becomes harder to predict during an economic downturn. People might suddenly hold back on their spending at the first sign of uncertainty because they worry about repaying their debts. This has a knock-on effect on the rest of economy, and a small problem can suddenly become a big problem.
Mortgage lending is also the main activity for banks, which in itself makes it a risk to the UK banking system.
Do we regulate the mortgage market?
The short answer is no, but we do regulate banks. We are mostly concerned with the bigger picture, as our job is to keep the economy safe from overall risks to the financial system. To do so, we have some powers.
In 2015, the Government gave us two new tools to restrict the proportion of risky mortgages that banks take on. First, we can limit the proportion of people who borrow a lot of money relative to the value of their house. These loans carry a lot of risk for banks. If house prices go down and the borrower can no longer pay their mortgage, the bank loses money if the house is then worth less than the loan.
Second, we can limit the proportion of people who borrow a lot of money compared to their income. If interest rates go up or incomes drop suddenly, these people are more likely cut their spending sharply.
What happens when you pay for a house?
You’ve found a house, signed the papers and the money now needs to change hands. Your bank transfers the money you’ve borrowed to your solicitor who will then send it to the seller’s solicitor.
As you celebrate your new home, the possibly biggest payment of your life is being processed behind the scenes.
Imagine if the money is sent in the morning but because of a delay in the payment system it will arrive in the evening. At midday, you check the news and to your horror realise that your bank has gone bust.
This is where the Bank of England enters the picture. All of the major banks in the UK hold bank accounts with us to avoid any such situations. We call this service Real-Time Gross Settlement (RTGS) because transactions can be settled instantly and finally. And as a central bank, we can’t go bust.
RTGS works in the same way as when you transfer money between two accounts in the same bank. The amount is simply deducted from one account and added to another. High-value transactions are processed in the RTGS service via a payment system called CHAPS. This is a risk-free, instant way of settling big payments such as when you buy a home.