Bank of England, Federal Reserve Weigh Support for Housing Amid Bubble Fears

NEW YORK (TheStreet) -- Central banks in the U.S. and U.K. are walking a thin line between trying to support the housing market and reducing the risk of another bubble in home prices.

The Bank of England Governor Mark Carney on Thursday said the central bank would cut support for mortgage loans, as it was no longer "appropriate or necessary for us to have our foot on the accelerator."

The Funding for Lending Scheme would cease to offer banks incentives for mortgage lending, according to a Reuters report. Under the scheme, banks were given favorable capital treatment for lending toward mortgages. The initiative would now be refocused toward small business loans.

The government's Help to Buy initiative, which offers support to homebuyers who cannot afford large downpayments, will continue, although the program has met with criticism.

Home prices in the U.K. have risen 7% over the past year and are forecast to rise another 10% in 2014. There have been concerns that the rapid rise in prices has been fueled by lending rather than rising incomes. 

The fact that homebuilding activity has not recovered has also added to worries that the rise in prices is unsustainable and strengthened criticism that initiatives to kickstart the housing market are not working.

Still, the withdrawal of the Bank of England's support for mortgage lending hurt homebuilder stocks on Thursday. Homebuilder stocks, which have doubled over the past two years, at one point lost more than 1 billion pounds in value according to Reuters.

In the U.S., rapid increases in prices have sparked similar fears of a bubble in some areas, though those concerns have abated in recent months as the gains in prices have shown signs of slowing.

The recovery in prices in the U.S., however, unlike the U.K., has been fueled by a shortage of inventory and strong investor demand. Mortgage credit conditions remain tight, although low interest rates have supported the recovery.

The Federal Reserve is monitoring the recovery in housing closely as it debates how and when to end its massive bond purchase program known as quantitative easing. Housing has been among the bright spots in the economy, so a slowdown or double dip in housing could mean a weaker outlook for the economy.

The Fed is likely to taper bond purchases only if it is certain the housing and economic recovery will continue without monetary stimulus. But the mere talk of tapering led to a 100 basis-point increase in mortgage rates in May and June and recent data has suggested that buyer demand has declined.

The decline in housing activity on the back of higher rates was among the factors that led the Fed to reconsider its plan to taper bond purchases in September.

Still critics believe the Fed may be stoking asset bubbles by keeping interest rates low for too long.

-- Written by Shanthi Bharatwaj in New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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