“There is a history of things shifting in the U.K. and the housing market moving from stall speed to warp speed,” Carney, 48, said in response after delivering a speech at the Economic Club of New York on Dec. 9. “We want to avoid that.”
The exchange highlights how Carney, the first foreigner to lead the Bank of England, is challenging Britain’s traditional indulgence with property by adopting measures to head off the increased speculation that has led to real estate bubbles. The new policies underscored his perceived role as a transformative figure for the 319-year-old institution, known as the Old Lady of Threadneedle Street.
House prices, sales and mortgage demand are all picking up, and threaten financial stability if the gains get out of control. Carney must balance an entrenched surge in London against the newer recovery outside the capital, while further action to cool housing may include him having to push back against government measures aimed at helping homebuyers at a time when affordability is already stretched.
“He’s in a difficult position, housing has always been a sensitive issue,” said Simon Wells, a former BOE economist who now works at HSBC Holdings Plc in London. “If the threats and the use of the bank’s toolkit don’t cool the market, he’s going to have to lean into that in the run-up to the general election, which may be politically sensitive.”
Carney began as governor on July 1 and the early steps by the former Goldman Sachs Group Inc. banker signal he’ll leave no corner of the central bank unchanged by the time he returns to Canada in 2018.
In addition to removing mortgage-loan incentives, Carney also revamped the central bank’s monetary policy by introducing forward guidance to foster the recovery.
The reverberations have spread beyond policy: he brought in U.S. consultants to help give the institution a makeover and bemoaned the lack of female policy makers, while sightings of him around London have become newspaper gossip fodder.
The novelties chime with the “fresh perspective” sought by Chancellor of the Exchequer George Osborne when he chose Carney to succeed Mervyn King over Paul Tucker, the favorite and a three-decade veteran of the central bank. Tucker, who announced in June he was quitting the BOE, is now a senior fellow at Harvard Business School.
In trying to curb housing strength, Carney is making use of new macro-prudential tools that the government gave the BOE as part of a revamp of banking regulation after the 2008 financial crisis. Wielding those powers, aimed at preventing a buildup of risks in the banking system, it announced Nov. 28 that its Funding for Lending Scheme would no longer directly encourage mortgage lending. It also ended a measure allowing banks not to hold capital against home loans granted under the program.
None of the tools at Carney’s disposal were available to King or his predecessor, Eddie George, who was governor from 1993 to 2003 and oversaw the bank’s move to independence in 1997.
Though there’s always been a “great middle-class love affair” with the housing market, officials should be wary of measures that would undermine it at a time when it’s still underpinning the recovery, said Patrick Minford, an economics professor at Cardiff University and a Treasury adviser under Prime Minister Margaret Thatcher.
“We’re in a very complex situation and we need common sense,” he said. “He’s going to try to reassure all parties that stuff’s under control.”
If the housing revival becomes unsustainable, Carney has pointed to other tools at his disposal, including raising capital requirements and making recommendations on underwriting standards and the government’s Help to Buy program, aimed at aiding homebuyers with small deposits. He’s the first governor to use the measures, and their effect isn’t certain.
“It’s uncharted territory,” said Ed Stansfield, a property economist at Capital Economics Ltd. in London. “The more you try to fine tune the market, the risk is that you overdo it one way or the other.”
With the Royal Institution of Chartered Surveyors forecasting an 8 percent increase in home values next year, the BOE may have to take further action. That could pit Carney against the man who appointed him. Help to Buy was unveiled by Osborne this year, and the bank’s Financial Policy Committee will review the measure annually. The first scheduled review will be in September, just eight months before the next election is due to take place.
Prime Minister David Cameron has heralded it as a measure to help “hardworking people” and is counting on it, along with a strengthening recovery, to help narrow Labour’s lead in polls over his Conservative Party.
With his new powers, Carney is having to gauge his response to meet the needs of a disparate market where price growth in London is outpacing the rest of the country. Will Tod, a real-estate agent in Carlisle, North West England, said while he’s seen transactions pick up, his region is still recovering, something officials will need to take account of.
“It’s a difficult job, having to please everyone in the smaller regional markets as well as London,” he said. “But the London market can’t be the sole basis on how decisions are made. It won’t help us if restraints are put on.”
Knight Frank LLP said in a Dec. 21 report that price increases in London’s luxury-home market will slow to 4 percent in 2014 from 7.5 percent this year as buyers shun neighborhoods such as Chelsea and Knightsbridge that fueled a five-year boom.
Carney is already trying to ensure he’s not seen as putting London’s needs above those of the rest of the country. He’s toured the country visiting businesses, and his first major policy speech was in Nottingham in the English midlands.
His personal trips outside the capital have also drawn attention, and photos of him and his wife Diana at the Wilderness Festival in Oxfordshire, 70 miles north west of London, made the national newspapers. Such is the fascination with the new governor that a barber in north London posted on his Twitter account that the governor is a customer.
Carney has also revealed a younger frame of reference. At his speech in Nottingham, he referenced local teenage musician Jake Bugg. It’s a contrast to King, 65, whose appearance in Newcastle in 2011 opened with a nod to Leo Tolstoy.
The focus of the August speech was forward guidance, which Carney adopted at the Bank of Canada before bringing it to the U.K. Under that policy, officials said they won’t consider a rate increase at least until unemployment (UKUEILOR) drops to 7 percent.
Guidance is meant to provide certainty to households that policy will stay loose even as the economy strengthens. Unemployment dropped to 7.4 percent in the quarter through October, the lowest in more than four years.
Carney has said the drop in unemployment is welcome and shows how the economy is strengthening. The U.K. may expand 2.4 percent next year, more than twice the pace of the euro area, according to Bloomberg surveys of economists this month.
King’s term as governor encompassed the run on Northern Rock Plc and the collapse of Lehman Brothers Holdings Inc. For Carney, the U.K. backdrop he’s confronting is in contrast to what economists and investors were expecting when appointed. At the time, there were concerns Britain was veering toward a triple-dip recession.
“Carney is a very lucky man,” said Nigel Lawson, who was chancellor under Thatcher. “He’s come in to office at a time when the economy, after a terribly difficult time, is starting to come good. That’s nothing to do with him, he is just in the right place at the right time. So far, so good!”
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