Changes could stoke up house buying costs and prevent first-time buyers getting on the ladder, but the media mustn’t let Osborne hide behind the BOE.
Amid the tepid England football performance, bruising humidity and predictable scapegoating around phone hacking, one amusing piece of news on Tuesday night was the BBC’s headline on how the Bank of England was like an “unreliable boyfriend”.
There’s been more flip-flopping over the prospect of an interest rates rise in recent weeks than in an episode of The Thick Of It. But the main worry here few seem to have grasped – aside from the effects on borrowers – is that policy-makers seem to be touting around monetary policy levers as tools to fix our housing crisis.
For George Osborne, having effectively passed the poisoned chalice of housing to Bank governor Mark Carney can be viewed only as a good thing. After all, like all politicians, the chancellor isn’t about to stand up and say he wants to reduce house prices.
Nor is he ready to admit that Help to Buy (or Help to Buy Votes as Labour call it) hasn’t actually had much effect. As I told Sky News a week before the official figures were published, the bulk of Help to Buy’s help occurred outside the South East.
Sadly, the chancellor is also not about to kick-start a council house building programme, but more on that later. Of course the prospect of an interest rate hike is news to no one. The
markets have long started to price this in. The stellar rise of Sterling is as good for Euro-bound tourists as it is bad for those coming here (and thus a sting in Britain’s tourism balance of payments).
The Monetary Policy Committee has been unanimous in keeping rates down, although experts have criticised its inconsistency in letting inflation remain consistently above target for years but this is now becoming intolerant as inflation falls below its target.
Yet sadly the current focus on Carney will not be on matters of fiscal and economic prudence but on his new assumed role as the country’s housing tsar.
Tomorrow the Financial Policy Committee (FPC), which controls bank lending rules, looks set to doll out some directives – the softer cousin presumably, of “policies”, on how to improve things. So what should Mark Carney, who chairs it, say to a media gorged on sporting light-weights, craving its weekly fill of mortgage-related gloom?
Firstly, he should tell Vince Cable to bog off and outrightly dismiss any ceiling on lending ratios. Why? Because when you look at the latest British Bankers’ Association figures, released yesterday, you can see that mortgage approvals have continued to fall. The BBA puts the blame at the door of new mortgage rules (following the Mortgage Market Review) which force banks and brokers to pry more deeply into people’s spending.
And this is why Cable’s lumpen comments widely reported two weeks back around straight-jacket earnings-to-value caps are unhelpful: You can have a borrower taking a loan of three times their salary, but if their outgoings (such as child maintenance, loan repayments and other living costs) are sky high, thus crushing their ability to pay, the ratio is pointless.
A couple of banks I’ve spoken to privately have expressed astonishment at these comments.
Some would point to RBS and Lloyds who, almost immediately, announce caps on their lending, but, as with the initial Help to Buy launches, the only reasons for this action is because they are state controlled.
It doesn’t surely need someone of Cable’s intelligence to work out that affordability tests – not binary calculations on lending ratios – should determine mortgages. And with the new rules only just into effect, why try and undermine them through careless media sound bites? Maybe it’s political.
Sadly this cap is the most likely lever to be pulled on Thursday by the FPC. It’s likely to crush the hopes of many in the South East who earn a tenth of the average London house price. Whatever happened to pricing in people’s future earnings?
Yet it’s fair enough the Bank considers risk and one other measure the FPC may implement is to hike up the capital banks need to set aside against loans they make. This effectively makes it costlier for lenders and could well see further hikes in fees which, for many, already equate to over £1,000. And that’s before lawyers, surveyors and agents get involved.
Returning to the question, the second thing Carney should say is that the Government should build more homes itself. Where I have sympathy with the Home Builders’ Federation is in their oft-repeated point that, throughout history, the private sector has only ever catered for a certain share of the market.
Having not replaced most of the council homes sold off under Right To Buy, we of course have a short-fall.
Yet with record-low interest rates, heaps of land and the potential for a nifty profit as our population continues to age and grow, thus further increasing household formation, it’s senseless that we keep avoiding the elephant in the room of renewed council house building.
Presumably the lofty position of Sterling right now means the Bank could arrange a clever currency hedge, combine it with a fixed low rate of debt and fund a whole pile of satellite towns to dot along Crossrail. It would make far more sense than pointless places like Ebbsfleet, in the middle of precisely nowhere.
The third thing Carney should probably make clear is that we don’t have a housing bubble. What we have is longstanding structural dysfunction. Sounds like a builder doesn’t it? Think of it like damp that’s gone unchecked for 25 years combined with wood rot in the hall and Japanese knotweed in the garden. That’s our housing market: ballooned in the 1990s off of cheap debt but marooned by spiraling demand in urban areas without the development funding or planning resources to cope with delivering supply.
Britain’s ability to deliver infrastructure around the Olympics – created in roughly one quarter of the time it took to build Heathrow’s T5 – is evidence of this: Government can click its fingers when it wants to.
So where this all leaves us is that the likelihood of interest rates beating England’s World Cup points tally this side of May is growing. Once rates start to rise, they’ll continue to do so. Which is all the more reason why we should demand real action on housing now and not let everyone hide behind the Bank.