I was told that the battle of Waterloo was won on the playing fields of Eton. (No, I don’t know what it means and I don’t think that it constitutes serious historical analysis). But the Governor of the Bank of England seems now to think that the battle of economic recovery (or at least the battle against the reversal of today’s encouraging growth trends) will be won in the housing markets of the UK.
With admirable clarity- the Governor’s eyebrows have never spoken less opaquely – Mr Carney and his deputy, Jon Cunliffe, have indicated their concerns that over-exuberant housing markets can sow the seeds of future problems. The recent headline figures on house price inflation, especially in London, suggest the source of their worries.
And these days those formidable eyebrows are backed up by an equally formidable array of powers. The Financial Policy Committee can intervene, in a variety of ways of varying strengths and impacts; only last month the committee acquired the ability to set the rates at which lenders must stress-test borrowers’ ability to service their loans (and thus affect the affordability assessment of applicants). I suspect that I am not the only commentator who thinks that regulators like to play with new train sets, and the June FPC meeting may well result in the shiny new stress-test recommendation power being taken out of its box.
But, as they consider their options, I offer some additional context.
Firstly, the London market paints a distorted picture and is driven in significant part by cash purchase. There are parts of the UK where housing activity remains very subdued and house price inflation is much lower. Any intervention needs to be targeted in a way which does not kill activity in some regional markets before it has even got going.
Secondly, the mortgage industry is coping with its new regulatory regime. Actually, it is coping pretty well and any worries over the whole market collapsing in a heap under the new regulatory burden have abated. But the effect of the regime will be to make fewer applicants eligible for mortgages – at the margin – and it will elongate the process by which mortgages are obtained. We have not seen the full implications of the longer process play out yet. This factor in itself is an inhibition on over-exuberance and it has not yet fully kicked in.
Lastly, whilst we are forecasting an uptick in lending volumes for this year, we do not see a never-ending ascent to the sort of lending activity associated with the boom years of 2005/6. The affordability of mortgages to the average consumer will be an inhibitor on market growth. Lenders have also revised their attitude to risk; they read, mark and inwardly digest the concerns expressed by the Governor and they (and their risk committees) are also acutely aware that house prices do not always go up (as seemed a very reasonable premise in 2005).
I hope that all this encourages a measured response by the authorities to house price rises and a response which is proportionate, targeted and contextualised. Just as Waterloo was not won by indiscriminate shelling.