The Bank of England and the Treasury have moved to put the brakes on the supply of cheap funds for lending to the retail sector, signalling that it now wants lenders to concentrate on giving a much greater level of support to small- and medium-sized enterprises (SMEs).
From the end of January, when the first phase of the Funding for Lending (FLS) scheme ends, the extended scheme, which runs for another year, will contain no additional borrowing allowances for household lending. The move comes against a background of mounting criticism, and accusations that the supply of cheap funding was increasing the danger of creating a bubble in house prices.
But the government's flagship Help to Buy scheme will continue and expand with Help to Buy Wales launching on 2 January. In England, borrowers can already apply for a mortgage under this scheme which extends the government's high loan-to-value indemnity scheme to cover second-hand homes. But this has also attracted criticism based on the premise that boosting demand without addressing supply will simply push house prices higher.
The most immediate effect of the withdrawal of Funding for Lending was to drive share prices of housebuilders lower. But anyone selling shares in a housebuilder has already seen an explosive rise over the past couple of years. And after the initial sell-off, prices stabilised, and small wonder too, because the latest shift in emphasis for FLS suggests there is now a sufficient supply of funds to allow banks and building societies to meet the demand for more mortgages. And demand for new houses will not go away unless there is a dramatic rise in interest rates or a recession, neither of which seems likely.
For SMEs, the news will be welcome, although there seems to be some difference between how difficult it is for a well managed and prosperous SME to gain finance as opposed to a company that needs to borrow just to continue in business. (See Finding non-bank finance).
