Four years after the chancellor of the exchequer pledged in his first speech to London bankers to arm the Bank of England with powers to prevent financial crises, surging house prices are putting pressure on officials to use them. The governor can scarcely avoid mentioning the topic himself in his own debut at the annual Mansion House event tonight, less than a week before he leads a BOE panel that will debate the need for action.
Osborne, 43, will also speak at the showpiece occasion held in the Egyptian hall of the 18th century Palladian residence of the Lord Mayor of London, opposite the central bank. With the housing market becoming a battleground in an election less than year away, the dilemma for Britain’s economic policy makers is how to prevent a bubble from forming without angering voters by creating barriers to homeownership.
“So far everything the bank’s been doing has been easing, and that’s been popular,” said Simon Wells, a former BOE economist who now works at HSBC Holdings Plc. “The big test for Carney is if he has the mettle to do something unpopular, whether that’s macroprudential policy or rate rises.”
The BOE kept its key interest rate at a record-low 0.5 percent this month. That, along with rising demand and a shortage of supply, drove homes values to a six-year high in May, according mortgage lender Halifax. The Royal Institution of Chartered Surveyors said today its house-price index rose to 57 in May from 55 in April, close to the highest since 2002.
The three-century-old BOE is facing pressure to act, with the Organization for Economic Cooperation and Development calling on it to consider further measures on property. U.K. Business Secretary Vince Cable said today the central bank must “stop this boom getting out of control,” and that a “stable” level of mortgage lending is about 3 to 3 1/2 times income.
“The Bank of England should not hesitate to use these powers, and any others we make available, should they see serious risks emerging in the housing market,” Osborne told lawmakers today.
Carney, 49, who replaced Mervyn King just under a year ago, has said the BOE is monitoring housing and will take action if needed. Policy maker Ben Broadbent told lawmakers yesterday that property is a “potential risk” to the economy, though rampant credit growth is a greater concern than price gains.
“We are not primarily in the business of identifying and ending bubbles,” he said. “What I worry about is if the recovery in the housing market encourages an increase in mortgages, and in particular high loan-to-value, loan-to-income, risky mortgages. That is what matters.”
The BOE’s Financial Policy Committee holds its next meeting on June 17. While its focus may be lending, the government has cited the lack of housebuilding as the source of potential market stress. Osborne said June 6 that building homes is the “only long-term answer.”
One upside from the pickup in house prices has been its impact on confidence and the recovery. The U.K. economy grew 0.8 percent in the first quarter and is on track to be the fastest-growing among the Group of Seven this year.
The gains haven’t translated into a boost for the ruling Conservative Party. The Tories are trailing the opposition Labour Party 31 percent to 37 percent, according to a YouGov Plc poll. The Liberal Democrats, the junior member of the coalition led by Prime Minister David Cameron, are on 7 percent.
The next general election is slated for May 2015. In European Parliament elections last month, the Conservatives came third in a national poll for the first time ever.
Osborne has helped to fuel demand for property with his Help-to-Buy program, aimed at homebuyers with small down payments. While he’s asked the FPC to monitor the policy, the panel also has other weapons at its disposal. These include recommending tougher capital ratios on mortgage lending or capping the the size of loans relative to a borrower’s income.
Part of the dilemma is how to properly gauge if Britain’s property market is overheating considering the disparity across regions. Annual price growth in London was 17 percent in March compared with 8 percent for the whole country.
“The big challenge going forward is how to tighten policy without derailing the recovery,” said Rob Wood, an economist at Berenberg Bank in London and a former central bank official. “These new macroprudential policy tools are new and untested.”
The BOE has already taken some steps, curtailing support for mortgage lending through its Funding for Lending program, while regulators have toughened rules as part of a so-called Mortgage Market Review. Home-loan approvals dropped to a nine-month low in April.
Some banks aren’t waiting for the FPC. Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have both imposed restrictions on lending, capping mortgages at four times salary, indicating they may be bracing for action from officials along those lines.
The share of loans that amount to more than four times a single income or three times joint income rose to 45 percent of all regulated loans, the most since 2007, according to a Matthew Pointon, an economist at Capital Economics Ltd. in London. A BOE survey in April showed banks more willing to lend at loan-to-value ratios above 90 percent.
“While the introduction of the MMR regulations appears to have caused a dip in the level of mortgage lending since January, it has as yet done nothing to bring down LTI ratios,” he said. “These figures do not give the FPC much of a reason to delay taking action to cool the housing market.”
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