Analysing events has from time to time, has the virtue that if you do so properly then events can be kind enough to seamlessly fit your argument. It was only yesterday where in the process of a Quis custodiet ipsos custodes? or who guards the guardians discussion about the clear flaws in both the concept and application of regulation, that I illustrated the case by referring to the Financial Policy Committee of the Bank of England. In the midst of concerns over house prices and a possible bubble they took a hear no evil, see no evil speak no evil approach to the subject. However they did have time to be worried about this.
The levels of leverage within, and therefore the vulnerability of, hedge funds needed to be looked at more closely.
One might conclude that this collection of Sir and Dame Humphreys was both toothless and worthless and today has come an endorsement of that view, from the Chancellor of the Exchequer George Osborne.
Matters look hopeful at first at least according to the Financial Times
George Osborne acts over housing boom fears
Okay so what has he done?
Is that like the emergency brake it is supposed to have on inflation? The one that is apparently demonstrated by missing the target and then wringing their hands? Here are the details again from the FT.
The BoE will be able to recommend that Mr Osborne reduces the cap on properties eligible under the scheme, presently set at £600,000, to reduce its availability in the capital’s booming property market.
The Bank’s Financial Policy Committee could also recommend that the Treasury increases the fees it charges lenders for the mortgage guarantees, pushing up the price of loans.
The original plan was for the Financial Policy Committee to review the plan after the scheme was supposed to end in January 2017. I write ‘supposed to end’ because there is a danger that like Quantitative Easing it becomes to an extent self-fulfilling and hence a permanent feature of the economic landscape.Again there is a nice coincidence of timing as it is today that the Bank of England Asset Purchase facility has £1.9 billion of Gilts maturing which it will recycle next week. Now they will meet every September to review the plan.
The obvious conclusion here is that the Chancellor is playing a public relations game conveniently on a day where there is a report of more house price rises (discussed below). If you read between the lines it is quite apparent that he agrees with me about the abilities of the FPC as he wishes to make it look as though something is being done when in fact like all Chancellor’s nothing would please him more than a pre-election boom.
Our political and economic establishment contradict themselves
A fundamental problem involved in giving the FPC more powers is that we were told they had plenty already. Ooops! You do not need to take my word for it as here is Bank of England Governor Mark Carney from the 28th of August.
The Bank of England is now in a position, for example, to supervise lending to specific sectors more intensively; to make recommendations to banks and building societies to restrict terms on which new credit is provided, or even to raise capital requirements on mortgages or other types of lending. Having these in our toolkit, and if necessary using them, will help us to keep interest rates low to secure recovery without creating risks that make that recovery ultimately unsustainable.
As you can see these would be capable of dealing with a house price boom assuming of course they were actually used in anger! Of course my contention is that it is not the weapons which are lacking but rather the will to use them. Mind you if you read the remit on the Bank of England website you could reasonably argue that it was there in black and white all along.
The FPC has a secondary objective to support the economic policy of the Government.
What are house prices doing?
What is it about the Nationwide house price index that the Chancellor was trying to smother in the news today?
UK house prices increased by 0.9% in September and were 5.0% higher than September 2012
There are also signs that the pickup is becoming increasingly broad-based. For the first time since 2007, all thirteen UK regions experienced annual house price growth in the third quarter of 2013.
The acceleration in house price growth from the subdued pace prevailing throughout 2011 and 2012 has been surprisingly quick
Indeed the Nationwide also refers to official policy being a factor in what is taking place.
Demand is being supported by an improvement in the availability and a reduction in the cost of credit, partly as a result of policy measures such as the Funding for Lending Scheme and Help to Buy.
Indeed added to this the Nationwide shows a graph comparing house prices (accelerating upwards) with wages ( growth is falling). I notice that they do not use real wages where we have seen sustained falls. Perhaps that is why our establishment is so keen on pressurising non-working spouses (mostly but far from always women) who choose to take care of their own children rather than work. One way of dealing with falling real wages for our establishment is to get more people working, and it also helps with mortgage affordability to have two earners rather than one.
What about the London bubble?
According to the Nationwide this is happening.
House price growth accelerated in London to reach 10%, the first time the capital has seen double digit growth since 2010. Prices in London are now 8% above their 2007 peak, with the price of a typical London home at £331,338.
Actually both Lambeth and Hackney reached annual rates of growth of 16% which provokes a wry smile from me as a born and bred Londoner. It just shows that areas can apparently reinvent themselves and they are far from alone in this. In the next group at 14% comes Newham where football supporters have been known to chant this.
I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Mind you it is not only there where it is popular sometimes I think I can hear it as I walk down Threadneedle Street.
A consequence of this
In a way this is a type of economic apartheid.
The gap between house prices in the North and the South of England reached a new high in Q3, rising above £100,000 for the first time. The typical property price in the South of England is now 74% above its Northern equivalent.
Although on the other side of the coin first-time buyers in the North have something to be grateful for which is cheaper prices!
Has it occurred to anybody (The FPC for example….) to put a geographical restriction on Help to Buy and perhaps also mortgages?
Let me first make a basic point that is often ignored. If you wish to make houses more affordable for first time buyers then lower prices would do the job nicely for them, especially as we are seeing sustained falls in real wages.
If we move to the specifics discussed today then it has been made ever clearer that the FPC of the Bank of England is not independent. As it is such a new body, that is some sort of record as the MPC did at least try for a bit before it became subverted and in my view perverted. I also note that rather than preventing a bubble the role of the FPC seems to be to observe it in a voyeuristic way and then report later. We may as well save the money and scrap it.
Oh and the word vigilant is now on its way into my financial lexicon…
Regular readers will know that this is a subject I am investigating and yesterday’s national accounts raised plenty of questions. I have spoken to the Office of National Statistics to inquire as to how they calculate an inflation statistic for a number they impute in the first place. I did ask if this counted as an imputation squared?!