In terms of credentials Mark Carney, former Governor of the Bank of Canada and current Governor of the Bank of England is arguably equipped to do the job. With a degree in economics from Harvard and a master's degree and doctorate in economics from Oxford University together with a prestigious career history with Goldman Sachs and the Bank of Canada, this is a man who must surely know his stuff right?
Credited with protecting Canada from the worst effects of the late-2000's financial crisis, his appointment at the Bank of England was a pragmatic move aimed at shielding the UK in exactly the same way.
So it's rather worrying to say the least that reports are emerging from Canada's banking community that suggest a property slowdown is imminent which could severely undermine the country's economy.
Canada's housing market makes a significant contribution to the economy, adding $1.7 trillion in economic activity since 2000 and $128 billion in 2013 alone. According to Canada's Scotiabank, for every $1 spent on housing, around $1.50 worth of economic activity is generated through associated things like movers, building materials suppliers, heating and cooling systems, and household appliances and fixtures.
Surely any economist worth their salt would seek to diversify economic dependency across varying sectors to avoid a potential nightmare if the one sector propping things up comes to a shuddering standstill – or worse still, a downturn?
In the UK, there is growing speculation that a property bubble is unavoidable and as we all know – ultimately, bubbles burst. Mr Carney has told MPs that the Bank of England "does not have the tools to directly affect" the property boom which he feels is fuelled mainly by foreign cash buyers but that he and the Bank continue to monitor the mortgage market for unnecessary risk levels. When questioned about the Government's "Help to Buy Scheme", Carney admits that he's keeping "a very close eye" on it.
Reading between the lines, are we being told that foreign cash will not be turned away even if it is at the expense of the domestic market which is almost entirely supported with mortgage finance? Will it become easier to buy property in the UK for those with the cash and harder for those (i.e. the majority of Brits) without?
If this is the case then surely it won't be long before prices are driven up by non-resident cash buyers to such an extent that the rest of us find ourselves completely unable to get so much as our big toe on the property ladder.
Mark Carney's response to the risk of an unfolding UK housing market bubble has been to take measures to counter starting initially with withdrawal of the funding for lending scheme for mortgages which kicked in at the end of January this year.
Whether this is a sustainable solution is uncertain but if you take a look at what is currently happening in Canada – where Carney was directly responsible for inflating house prices in excess of 80% - the UK could well be heading for disaster in exactly the same way.
If UK property prices continue to increase at the rate they have been over the last 12 months, it won't be long before even foreign cash buyers are completely priced out of the market with returns becoming too miniscule to warrant the investment let alone the escalating risk of the property market collapse. Combine that with a domestic market also priced out of the game due to restrictive lending policies and the inevitability of a dramatic slump looms very large on the horizon.
It will be interesting to see what Mr Carney has to say for himself when the inevitable becomes a reality.
- Tuesday 22 April 2014