Having seamlessly absolved themselves from responsibility, the government continue to ignore the lack of housing supply that is currently fuelling property prices, instead placing the onus for cooling the market firmly on Mark Carney, governor of the Bank of England. Carney has given the Bank's Financial Policy Committee (FPC) instructions to prepare for a June 17 decision on what 'tools' are to be implemented to resolve the most critical issue for the British economy.
This comes on the back of the BoE's Inflation Report earlier this week, when Carney fielded questions about a possible housing bubble and his decision to avoid using interest rate policy to slow down price increases, a tried and tested tool against inflationary markets.
Housing has become the biggest threat to Canadian Carney's reputation, particularly in view of the mess he left behind in his previous role as governor of the Bank of Canada during which time, property prices inflated by over 80%.
Economic commentator Pater Tenebrarum comments that "Mark Carney is widely hailed as some sort of central banking superhero due to the fact that Canada did not sink beneath the waves during his tenure. We say he was nothing but an unmitigated inflationist, whose legacy is one of the biggest housing and consumer credit bubbles in history (global history that is, not just Canada's)."
Is the UK housing market heading the same way as Canada?
During Carney's time with the Bank of Canada, he avoided using interest rate policy to quell the housing boom prompting the government to intervene four times to tighten mortgage rules, a measure which has already been taken in the UK following the Mortgage Market Review in April with further measures being hinted at when Carney delivered the Inflation Report this week.
The similarities between what has happened with housing in Canada and what is happening in the UK are quite shocking and unfortunately, the supply shortage that is driving up prices in UK is concentrated in the affordable housing sector of the market – just as it is in Canada.
It is not surprising then that Canada's attempts to restrict borrowing by tightening mortgage rules failed to slow price increases because such measures only tend to affect those at the lower end of the market – where the supply shortage is at its most critical levels – rendering it an almost completely ineffective policy.
What goes up doesn't necessarily go down
Record-low borrowing costs and government incentives have revved up house prices in the UK and the only action to turn the situation around has to be to increase borrowing costs and incentivise homebuilders to address the supply issue. The Bank of England is simply not empowered to resolve this issue without decisive action from the government and yet the two don't appear to be working together towards this goal at all.
Affordability tests came into force in the UK last month, requiring borrowers to prove they can afford repayments even when interest rates rise in line with market expectations. The FPC has already said that a tool to make those tests even more stringent which will be implemented as soon as June.
What this means is that there is likely to be a higher capital requirement or maximum loan-to-value ratio on mortgages. The BoE could also recommend that the government curtails its Help to Buy program. The net result of these measures will be to make low supply 'affordable' housing even less affordable and it certainly won't get more homes built, leaving the housing sector in crisis for an indeterminate length of time.
- Friday 16 May 2014