Review on the FPC’s report

The table below shows that the cost of an average house in the UK (and its regions) is ten times bigger than the average Salary based on ONS House price index. London comes first of the league with a House-price-to-salary ratio of 14.18, which is not surprising after ONS showed earlier this year that London property market is 25% above the 2007-2008 peak.


(Source: ONS)

This morning, Bank of England Governor Mark Carney announced new measures on mortgages in order to ‘control’ the potential bubble in the housing market that UK is experiencing at the moment. Even if he mentioned that the threat ‘is not imminent’, the BoE is still concerned about the level of debt of UK households. Therefore, he came up with a couple of measures:
1. The BoE introduced a cap on mortgages: banks cannot hold more than 15% [in their portfolios] of the number of new residential mortgages that equal or exceed 4.5 times the borrower’s annual income. The Treasury will ban all applicants that are asking for a loan superior to 4.5 times their annual income through the Help to Buy Scheme.

2. The committee also suggested that lenders should stress test if borrowers can cope with a three percentage point rise in interest rates within the first five years of the loan.

Cable rose significantly after the announcement and reached a high of 1.7039 during London trading session. It was quite a surprise as the market was expecting the British pound to ease against the US Dollar (and the Euro) after Carney’s (kinda) dovish tone before the Treasury Select Committee a couple of days ago. The 2-year UK yield is down 10 bps to 0.837% (compare to 10 days ago), and the implied rate on the short-Sterling March 15 contracts eased 3-4 bps.
EURGBP is trading back below its 0.8000 level as EURUSD keeps fluctuating between 1.3600 and 1.3650. The next support on EURGBP stands at 0.7980, followed by 0.7960.

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