Advance Exoneration of the BoE

BoE governor Mark Carney, who has already left one of the biggest housing bubble's in modern history in his wake in Canada, is evidently aware that he has a similar problem in the UK as well. There are two aspects of the revived UK housing bubble he indeed has no control over, which allows him to fashion excuses for the central bank in advance (just in case the bubble bursts one day – which it will, the moment interest rates rise). Carney is at least to be commended for admitting that there might be a problem – after Bernanke's widely publicized housing bubble forecast gaffes in 2006/7, central bankers have apparently become more careful – but he cannot escape responsibility for being one of the major central planners in the UK economy.

According to Reuters:

 

“Bank of England Governor Mark Carney gave his strongest warning to date about the risks of a housing bubble and said the Bank was looking at new measures to control mortgage lending amid a shortage of home building.

The British housing market has "deep, deep" structural problems, chief among them insufficient construction of new homes, Carney said in an interview with Sky News television broadcast on Sunday.

"When we look at domestic risk the biggest risk to financial stability, and therefore to the durability of the expansion, those risks center in the housing market and that's why we are focused on that," he said.

Helped by a recovery in the economy, record-low interest rates and government schemes to help home buyers, British house prices jumped about 10 percent in the 12 months to April, raising concerns that buyers will take on too much debt.

Carney has previously said the Bank will seek to use its new powers over credit before it resorts to raising interest rates.

He made clear on Sunday that he saw the biggest problem in the property market as the shortage of new homes, saying twice as many houses were built each year in his native Canada than in Britain which has double the population.

Construction started on more new homes in England last year than at any point since 2007. But at 123,000 units, house-building remains short of the 200,000 which many economists consider to be the minimum needed each year.

"We're not going to build a single house at the Bank of England and we can't influence that," Carney said.

Also speaking to Sky News, Prime Minister David Cameron said Carney was "absolutely right" to point to the lack of housing but said government programs were helping to get more built.”

 

 

(emphasis added)

Indeed, the BoE neither controls the number of houses built in the UK (which is indeed relatively low due to insane zoning regulations), nor did it invent chancellor Osborne's crazy mortgage subsidization schemes. All the BoE does is control what is without a doubt the by far most important variable in the pricing of long-lived assets like residential real estate: the interest rate and the rate of monetary pumping that is necessary to keep the short term interest rate as low as it is. We're not sure what Carney means when he says it is 'focused' on the developing bubble. Is he going to hike rates to stop it? That is going to be the only thing he can possibly do, but we know already that he won't.  'Focusing' on the emerging bubble will by itself not alter the situation one bit. Here is what has happened to prices lately:

 

annual prices




UK-wide change in house prices, annualized percentage rate – click to enlarge.

 

monthly change

The monthly change rate shows how prices are accelerating in bubble-fashion of late – click to enlarge.

 

An Accelerating Bubble

One must keep in mind that in the North of Scotland, prices are still declining, so the price rise in the rest of the UK is even greater than the aggregate data convey. On the other hand, London is traditionally 'bubble central', not least because many rich foreign buyers, from Ukrainian and Russian oligarchs to Arabian sheiks and rich Chinese businessmen are buying high end property there without any regard to their prices.

However, it is not just high end properties the prices of which keep rising by leaps and bounds. Most of the transactions in London (some 35% or so) take place in the 150 – 250,000 pound range. Meanwhile, the average UK home price is nearly back at the previous bubble highs, and it is expected that prices will rise at least another 8% in 2014 (the current y/y growth rate is however 10%, up from 8% at the end of last year, so the bubble is accelerating and it could well be that the 2014 change rate will end up at a far higher level than 8%).

 

average price

The average UK house price – nearly back at the bubble peak of 2007, and almost certain to exceed it this year – click to enlarge.

 

The Problem

So what is the problem with all this? As usual, the extremely low level of interest rates combined with government subsidization of mortgage credit make it appear to many people as though these prices were 'affordable'. As a result, more and more people are up to their eyebrows in mortgage debt. Many of them would not be able to afford these loans without the 'double subsidy' from interest rates and the government's scheme (most people are also blissfully unaware what a big difference a rise in rates will make to their monthly payments). Even with these incentives, 'many are unable to buy' due to the property boom. It is to be feared that the government will feel compelled to provide even more 'help'. The problems will only become apparent when interest rates eventually rise.

Also, the government is evidently trying to relax the regulations that have kept supply in check. So it is already foreseeable that the day will come when the market is a lot less 'tight'. Moreover, today's inventory and supply/demand situation tells us nothing about tomorrow's: Once interest rates rise and mortgages become more difficult to afford, both the demand for houses will decline and the supply will inevitably increase (due to 'underwater mortgages' and the associated increase in foreclosures). The seemingly 'virtuous spiral' of inflation will turn into a vicious deflationary spiral that will weigh on debtors and creditors alike.

The UK banking system has only just barely survived the mild decline in prices caused by the bursting of the previous bubble. However, due to the government's skewed incentives, the banks have dived headlong into mortgage lending again. The longer this continues (and it looks set to continue for a while longer), the riskier their loan books will once again become.

It is highly likely that we will eventually see the 'too big to fail' doctrine tested once again as a result. Our prediction: if need be, the big banks will be bailed out all over again.

 

Mark_Carney_2605139bMark Carney: solemnly warns about the property bubble his own policies have helped set into motion.

(Photo via telegraph.co.uk)

 

 

Charts and data by This is Money (UK), Halifax, Nationwide

 

 

 

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4 Responses to “Mark Carney: If There is a Bubble, It’s Not Our Fault”

  • Calculus:

    Successive UK governments have known for 20 years about the upcoming housing/shortage problem in the UK. But they all did nothing as higher house prices were better for their election chances. Proof if it was ever needed just how low the politicians really are – putting their own needs above the needs of the country’s long term best interests.

    Now however the property problem is turning the other way as in the young can’t afford to buy and the young (under 30) can now vote. So in the coming years you’ll be hearing more from politicians saying ‘vote for me and you’ll be able to afford a property as my policies promote house building and affordability’.

    What a sick joke the majority of politicians are.

  • hettygreen:

    I live in the wake of Mark Carney and keep thinking how appropriately named the man is. There is a vast number of house horny rubes here in Canada who have been absolutely taken in by this central barker and irrevocably inducted into perpetual debt serfdom. Marley with his cash boxes and chains has nothing on this crew.

    • jimmyjames:

      I live in the wake of Mark Carney and keep thinking how appropriately named the man is

      ***********

      Miss Witch ..

      Agree ..
      The name does gel with the face and the unscrupulous tactics he used to draw in the sheep ..
      There’s just something about him that makes your skin crawl .. like Hillary .. they should both be thrown in jail .. just because of the way they “look”

      The big wakeup in Canada lies ahead .. grab onto your ass taxpayers ..

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