Monday, 19 May 2014
House prices: the Bank of England must act now
The weekend warning on house prices issed by Bank of England Governor Mark Carney (above) is welcome, but overdue. The UK's sudden switchback - from eternal economic winter to fevered boom - is no surprise to economic historians, of course. But it still feels like a handbrake turn-style squeal of gears and brakes, and it's disconcerted policymakers today just as those sharp angles have in the past. The Bank is being left scrambling to catch up.
To use Guardian economics editor Larry Elliott's phrase, the Governor has chosen to ramp up to the 'hot' bits of Defcon Four - and move towards Defcon Three. In Cold War parlance, that means we're half ways towards using the nukes.In this case, that'd be a really sharp rise in interest rates during 2015 - something that might well leave a lot of people looking at a lot of bricks and wondering 'how could I have been so stupid?'
But something has to be done, and soon. Start with this: the housing market always ends up stronger in British booms, and always performs more bullishly, than policymakers think. It's that insight that historians can bring to the debate. House prices 'outperformed' the fundamentals, and all forecasts, in 1963-66. In 1971-73. In 1985-89. And then, most catastrophically of all, from about 2001 to 2007. Take a chart of house price predictions in all of those booms, and then plot reality against them, and the 'real' line is always higher and steeper than what all the economists and statisticians thought at the time. The British obsession with house prices is no longer susceptible to supply-and-demand analysis. Always very difficult to predict, dependent on the amount of credit in the system and very sensitive to institutional rigidities and biases, British house prices are not now a matter of normal economics. They require experts in psychology, social pathology and anthropology. As terrified thirtysomething couples huddle in dingy flat doorways in South London, whispering about whether they can get their parents to stump up another £50,000 to pay for a £450,000 flat that is worth ten times the couples' joint earnings, you need to speak the language mentalities, manias, crashes and busts.
Now it's important not to get too carried away. This is really a phenomenon that's making London and the South-East uninhabitable. Have a play around with the house price calculator here, and most people with a job in the household can afford to rent or buy across most of the UK. But that doesn't help you much if you've just been offered a really good job in London, does it? It reduces labour mobility, cuts labour productivity and gives the whole crazy system one more twist around. And the ripples are indeed beginning to spread out - first to cities such as Bristol, Oxford and Cambridge, and now more widely.
But what can the Bank do? Regular readers will know that 'Public Policy and the Past' has been warning about house prices for some time. And the only real remedy is for more housebuilding. Much more housebuilding. Everywhere - including on 'green belts' that are often sterile and played-out bits of field and hillside anyway. We don't just need an increase in building - we need a step-change that would double levels of bricks-and-mortar output within a Parliament. That won't happen, by the way, but it's still the right answer.
In the short term? The Bank must get much more aggressive. No-one listens to public policy makers any more, and buyers are unlikely to take heed of the Bank's mere words. After the European Exchange Rate Mechanism, Iraq, ID cards, Universal Credit and Andrew Lansley's scrambling of the NHS, why should anyone listen to what officials say? I know that characterisation is unfair, by the way, but voter's disgust at the main three parties shows us that this is what they often think.
Here's a shopping list, in no particular order. The Government's 'Help to Buy' scheme should be ended immediately, buried and forgotten about - though paring it back to help lower-income families, as suggested by Liberal Democrat leader Nick Clegg, would be a start. The Bank could insist on new evidence and new rules for the mortgage checks the UK has just introduced. It's still too easy to get around these for existing customers, and for borrowers with perhaps shaky evidence of their incomes. Stress tests for mortgagees could be made tougher, so that banks would look at buyers' exposure at ten or twelve per cent mortgage rates. And then actual caps could be imposed on prices-to-earnings ratios.
That might hold the line for a while. But make no mistake - the Bank is going to have to raise interest rates, sooner than the Monetary Policy Committee wants to, and probably in the early New Year of 2015. Then, and only then, will we see whether they have the guts to take on the property fever that's gripping the South-East of England - making the richer much, much richer than they would otherwise be, and threatening the economic recovery in the rest of the UK.
For now? Talk is fine, and a useful indicator of where we're going. But the Bank has new powers for a reason. It should use them - not tomorrow, not next week, but today. Now.