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By David Milliken and Huw Jones
LONDON, Nov 28 (Reuters) - The Bank of England moved to headoff the risk of a bubble in house prices on Thursday, making asurprise announcement that it would heavily scale back a schemelaunched last year to boost mortgage lending.
Britain's economy and its housing market have staged anunexpectedly strong turnaround since the BoE launched theFunding for Lending Scheme (FLS) with the finance ministry inJuly 2012 to help increase lending to home-buyers andbusinesses.
The FLS scheme will now focus solely on enabling greaterlending to small firms that still find it hard to borrow and BoEGovernor Mark Carney said the Bank was ready take largermeasures to control the housing market if needed.
"We did not see an immediate threat coming from the housingmarket but we are concerned about the prospective evolution ofthe housing market," he told reporters. "The concern is wherethis could go. We definitely see some short-term momentum."
Carney said the changes to the FLS did not have implicationsfor a separate government scheme, Help to Buy, which aims tolift construction and assist home-buyers who lack large mortgagedeposits, and which the BoE will review next September.
Shares in British home-building companies fell heavily afterthe surprise announcement.
British finance minister George Osborne said he backed thechanges to the FLS scheme.
Earlier this week Carney faced questions from lawmakers whoare worried that a house price bubble is in the making, and thatBritain's economic recovery is hampered by a lack of lending tosmall firms.
"We should refocus the FLS so that it continues to supportlending to the business sector, without adding further broadsupport to household lending at a time when that is no longernecessary," Carney said in a letter to Osborne.
Economic growth in the three months to September was thefastest in three years, banks have far easier access to finance,and house prices are now rising at an annual rate of nearly 7percent on some measures, above their long-run average.
Most of the increase in house prices is concentrated inLondon and nearby areas, but Carney said price rises now seem tobe spreading more broadly across the country, and that someexternal forecasters predicted a 10 percent rise for 2014.
Under the FLS, banks and building societies are able toaccess cheap credit from the BoE in proportion to how much theyincrease lending.
On Thursday, the BoE said that increases in lending tohouseholds from Jan. 1, 2014 would not entitle banks to accessto cheap finance, although existing entitlements would not beaffected. Fees charged to banks business finance would bereduced to the lowest point on the existing scale, 0.25 percent.
The BoE also said that favourable capital treatment for newhome loans made under the FLS would end on Dec. 31. Five, mainlysmall, lenders benefit from this at present.
The BoE also signalled that it was ready to take furtheraction to cool housing if need be, including recommending a capon how big mortgages can be relative to property values andborrowers' salaries.
Currently the BoE lacks the power to force banks to followits recommendations on such caps, but it could instead requirebanks to hold extra capital against risky lending - anotheroption that it outlined.
Away from Britain's housing market, the BoE said a strongereconomic outlook meant that risks to financial stabilityappeared lower.
However, risks remained as many countries, firms andindividuals were highly indebted and vulnerable if a sharp risein interest rates outpaced any increase in their incomes.
