Carney’s Hottest Topic Sets BOE Thinking on Housing Curbs

Mark Carney has given himself one month to decide on what to do about the hottest topic in the U.K. economy: the housing boom.

Batting away questions on a possible property bubble this week, the Bank of England governor pushed the onus for cooling the market onto his financial-stability officials. The Financial Policy Committee now has four weeks to prepare for a June 17 decision when it can either unleash untested tools to curb lending or come up with a good excuse as to why it didn’t.

With the economic recovery broadening and inflation under control, housing has become Carney’s biggest domestic concern -- and threat to his reputation -- as he heads toward his first anniversary in charge of the BOE. Tackling a property boom revved up by record-low borrowing costs and government incentives, the governor will need to keep the Treasury posted on progress and involve rate-setting policy makers in meetings to keep everyone in the loop.

“It would be surprising if we didn’t get something in June,” said Mike Amey, a money manager at Pacific Investment Management Co. in London. “The clearest component of economic strength in the U.K. at the moment is the housing market.”

Carney said on May 14 that interest rates were the “last line of defense” against housing risks and that the FPC would “look hard” at vulnerabilities. BOE Chief Economist Spencer Dale, who will join the FPC next month, has said the June meeting could be “quite significant.”

More Measures

Financial-stability officials have already ended incentives for mortgages and announced a set of bank stress tests. The panel, which will publish its recommendations on June 26, has said it’s ready to take more action if needed.

“What we don’t have at the FPC, and never will have, is an ability to control all aspects of the housing market,” Carney said. “We can’t perform miracles. What the FPC can do is to reduce risks that emanate.”

Carney’s comments this week “shine the light a bit more keenly on the FPC,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London. “This is the first meeting that anyone’s really going to be paying attention to, so one would hope that the communication will be very clear and lay down a marker and establish credibility.”

Possible Tools

Affordability tests came into force in the U.K. last month, requiring borrowers to prove they can afford repayments even when interest rates rise. After its March meeting, the FPC said a tool to make those tests more stringent will be available as soon as June.

This, along with higher capital requirements or maximum loan-to-value ratios on mortgages, are options for the committee. It could also recommend the government curtails its Help to Buy program.

House prices jumped almost 11 percent in April, the biggest annual gain since 2007, according to Nationwide Building Society. The Royal Institution of Chartered Surveyors said this month values are on a “firmly upward trend.”

The property revival is helping to boost the profits of homebuilders. Bovis Homes Group Plc said today trading is “strong” and the outlook “very positive.” The number of loans advanced to first-time buyers was 24,400 in March, up 24 percent from a year earlier, data from the Council of Mortgage Lenders show.

While some MPC members have expressed concern about the price gains, others, including Deputy Governor-designate Ben Broadbent, are more sanguine. He said yesterday that the central bank wouldn’t focus on house prices, but on credit growth.

‘Pent-Up Demand’

BOE data show that the stock of outstanding mortgages was 1.28 trillion pounds ($2.2 trillion) in March, little changed from 1.27 trillion pounds a year ago.

“The housing market is reflecting pent-up demand which will become exhausted,” said Alan Clarke, an economist at Scotiabank in London. “The impetus will fade. It’s sensible for the BOE to be alert to the risks, but in June we’ll probably see language rather than hard action.”

One reason for steering clear of definite measures is the unknown potency of macroprudential tools. BOE official Andy Haldane has admitted they are “untested.”

“What they need to do is work out what they’re trying to achieve,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London who has written a book on macroprudential policy. “Is it protecting the banks from the housing market, or something beyond that? They’ll probably fire a shot across the bow in June. It will probably be more communication and guidance.”

Financial Shocks

The BOE is about to gain an official who’s been working on the subject. Kristin Forbes, a professor at the Massachusetts Institute of Technology known for her work on the propagation of financial shocks across countries, will join the Monetary Policy Committee in July having recently done work on macroprudential policy and capital controls.

“The U.K. is a very open economy and it’s important to have someone who understands international contagion channels,” said Helene Rey, an economics professor at the London Business school and member of the board of the French banking regulator, Autorite de Controle Prudentiel. “Her work in applied economics will be helpful.”

Before it's here, it's on the Bloomberg Terminal.