28th Nov 2013 14:21
LONDON (Alliance News) - Shares in British housebuilders fell sharply Thursday, dragging the broader stock indices off their highs, after Bank of England Governor Mark Carney withdrew the funding for lending scheme for household lending.
Carney said the scheme will be extended just for small businesses in 2014 because credit conditions for those business have improved to a lesser extent than the significant improvement in household credit conditions.
"The FLS has contributed to a substantial fall in bank funding costs since it was launched in July 2012. This has fed through to significant improvements in household credit conditions. Credit conditions for smaller businesses have also improved, but to a lesser extent, and lending to businesses overall remains muted," the central bank said in a statement.
"Although the growth in household loan volumes remains modest, activity in the housing market is picking up and house price inflation appears to be gaining momentum. As a result there is no longer a need for the FLS to provide further broad support to household lending," it added.
The move has been backed by Chancellor of the Exchequer George Osborne.
The bank and the treasury launched the scheme in July 2012 in an attempt to incentivise banks and building societies to boost their lending to the UK real economy. It does this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their lending performance.
Lending to smaller businesses in 2014 will continue to be encouraged by allowing banks to draw GBP5 in the scheme for every GBP1 of net lending to SMEs. But household lending next year will no longer earn any such additional borrowing allowances, the central bank said.
Housebuilders have cited the scheme as one of the reasons for the strong pickup in the UK housing market this year, as bank and mortgage lenders increased the number of mortgages they were offering.
"We did not see an immediate threat coming from the housing market but we are concerned about the prospective evolution of the housing market," Carney told reporters. "The concern is where this could go," Carney added. "We definitely see some short-term momentum."
The bank also signaled that it is prepared to take further action to cool the housing market, if needed.
However, the withdrawal of the Funding for Lending scheme won't impact the separate Treasury Help to Buy scheme, which guarantees parts of a mortgage, meaning house buyers with a small deposit can meet lenders borrowing requirements and get on the housing market. This has also been cited as a driver of the recent sharp increase in house prices.
Earlier in the day, Carney wrote in a letter to the Treasury Committee that the Financial Policy Committee only has the power to advise the British government on the Help to Buy scheme and doesn't have a veto on the program.
Persimmon PLC was the biggest faller on the FTSE 100 Thursday afternoon, down 6.4% at 1,166 pence, while Barratt Developments, Taylor Wimpey PLC, Bovis Homes Group PLC and Bellway PLC were the biggest fallers on the FTSE 250, all down more than 3.9%.
By Steve McGrath; [email protected]; @SteveMcGrath1
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Related Shares:
Bovis HomesBellwayBarratt DevelopmentsPersimmonTaylor Wimpey