BOE’s Miles Says Rates Too Blunt for Housing Risks

Bank of England policy maker David Miles said interest rates are not the best weapon against a buildup of risks in the housing market and should only be used when other tools have been exhausted.

“Monetary policy can be retained as a ‘last line of defense’ against risks to financial stability,” Miles said in Dallas yesterday. “Policy instruments more precisely targeted at the housing market can be helpful in dealing with situations where the level of interest rates that might be best suited to the wider economic situation is not the same as the rate that might be needed to stabilize the housing market.”

Britain’s strengthening property market, in part supported by government stimulus, has stoked concerns that a bubble is forming. While the BOE’s Monetary Policy Committee has said it will keep its key interest rate at a record low of 0.5 percent until unemployment falls to 7 percent, its pledge is conditional on financial stability not being threatened.

Miles, speaking at a conference hosted by the Federal Reserve Bank of Dallas, said the problem with using monetary policy to stabilize the housing market would be “acute” if property was overheating while the wider economy wasn’t and inflation was low.

“Variations in interest rates that central banks can control are rather a blunt instrument,” he said. “Indeed the impact on assets other than houses, and the effects on borrowing and spending unrelated to housing, may well be far greater than the impact on housing.”

Stability Tools

Among the tools that officials may use are tougher underwriting standards, varying capital requirements on mortgage lending, and limiting loan-to-value ratios, Miles said.

He also proposed a plan to reduce the level of borrowing by homebuyers, saying that greater use of outside equity may help counteract some problems created by excess leverage.

“The fact that houses are bought with large amounts of outside debt is one reason why housing market outcomes over the past ten years have been so volatile,” Miles said.

Without commenting on the impact of the U.K. government’s Help to Buy plan on house prices, Miles said it was an example of an equity program that has “proved popular” compared with previous efforts, which had a “patchy success rate.”

Help to Buy, designed to help Britons get on the property ladder, has been criticized for potentially overheating the market. The Royal Institution of Chartered Surveyors said this week its house-price index rose to an 11-year high.

If homebuyers relied less on debt, this would probably reduce individual household risk and aggregate housing market volatility, as well as decrease dependency on macro-prudential and monetary tools to limit busts and booms, Miles said.

While one way to increase the use of equity in home purchases is to set limits on loan-to-value ratios, that would push back the point in their lives at which individuals could hope to become homeowners, Miles says. Instead, outside equity funding, including equity loans, could be used, allowing investors to share the risk and rewards of ownership, he said.

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