Carney and the UK housing boom
BoE needs to signal how it will contain house-price growth
With one year to go before the next general election, David Cameron’s government is enjoying a remarkable rush of good news on the economy.
Economic output has increased by more than 3 per cent over the past year, its fastest rate of growth since the crisis. Unemployment has fallen quicker than most economists had forecast, with the jobless rate in the first three months of this year down to 6.8 per cent. Real wages are on the rise for the first time since 2010, signalling that living standards are finally improving for some Britons.
But while all this spells good news for the government, it has brought new challenges for Mark Carney, governor of the Bank of England. As the recovery gains momentum, Mr Carney and the Bank’s Monetary Policy Committee are under pressure to decide whether – and when – they will raise interest rate to keep inflation in check.
At the same time, Mr Carney needs to address the phenomenon most likely to derail the UK recovery: the housing-market boom in London and the South East.
Delivering his latest assessment of the health of the economy on Wednesday, Mr Carney effectively scotched any chance of an interest rate rise this year. The governor acknowledged that the UK has “edged close to the point at which [the] bank rate will need gradually to rise”. But he ruled out an early tightening of monetary policy, warning the economy has only just started to “head back towards normal”.
The BoE gave a convincing explanation for its caution over raising rates. The lack of any pickup in productivity is clearly worrying. But this is set against other factors. While unemployment is falling fast, the 6.8 per cent jobless rate remains high when set against the long-term trend in the UK. Both this – and the number of people saying they want to work longer hours – suggests there is still some slack in the jobs market. At 1.6 per cent in March, inflation was still below the BoE’s 2 per cent target.
The BoE’s stance on house prices gives more cause for concern. House prices in London have risen by an average of nearly 18 per cent in the past year, boosted by the government’s ill-judged Help to Buy scheme. The BoE is clearly concerned about this, saying that “new lending at high loan to income ratios has surpassed pre-crisis levels, particularly for high value properties”. However, Mr Carney is somewhat reticent in spelling out what action the BoE might take if fears of a bubble intensify.
The governor said on Wednesday that a rise in interest rates would be his “last line of defence” against a growing housing-market risk. But there are other tools at his disposal. Last year George Osborne, the chancellor, gave the BoE’s Financial Policy Committee the green light to examine the government’s Help to Buy scheme annually. The FPC could take a range of actions to cool the housing market, including capping mortgages via loan-to-value or loan-to-income ratios.
At its meeting next month the committee, which is chaired by the governor, should spell out publicly in what circumstances it would use these and other tools to curb the rise in prices. At the very least, this would warn the public that more restrictive policies on housing may be on the horizon.
Mr Carney has stated repeatedly that the BoE cannot set policy on the basis of economic developments in one UK region. And he is in the unenviable position of having to contemplate restraining a flagship government policy in the final year before an election.
However, if the governor fails to take action to curb house-price rises soon, he may end up being forced to cool the market by using the much blunter instrument of an interest-rate rise.