With his grey hair and gloomy demeanour, Sir Mervyn King, the outgoing governor of the Bank of England, has always been just the man to bring a bit of misery to any party.
True to form, even in his last few weeks in the job, and with some tentative signs of recovery in the British economy finally appearing, he has warned that a fresh housing-market bubble is getting going. In particular, the government risks stoking an already over-heated market with its schemes to guarantee mortgages.
The trouble is, there is no point in the governor just raising the alarm. It is no more likely that he will be listened to than he was the last time the property market ran out of control in 2007 and 2008. If the Bank is genuinely worried about a bubble then it should try doing something about it such as raising interest rates, tightening lending rules, or cutting off the flood of cheap money to the banks.
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We have been here before. In early 2008, several months before the credit crunch, Sir Mervyn warned families to brace themselves for falls in house prices of up to 20%. Indeed, from 2006 onwards the governor issued a steady stream of warnings that the exceptionally benign mix of strong growth and cheap credit that fuelled the run-up in house prices was unlikely to last forever.
Now he is at it again. Last weekend, he warned that the government's scheme to help revive the housing market by partially guaranteeing mortgage loans risked getting the state too deeply involved in the industry.
Fannie Mae, the state-backed body that guaranteed mortgages in America, helped to create the sub-prime debacle there. There is a risk that the government could be doing the same thing in this country, he suggested.
There is certainly something to worry about. Rightmove reported this week that average asking prices in Britain rose by 2.1% in May, the fifth consecutive monthly rise. In the first five months of 2013, prices rose by 9%. The average house price has now hit £249,841, and in London the average price is more than £500,000.
Given that the economy has only narrowly avoided a triple-dip recession, that overall output is still lower than it was in 2008, and that real wages are stagnant at best and in many cases falling, that is odd.
The average house price has now hit nine times average earnings. You need to be earning £62,000 a year to get a loan to buy the average house, but the average salary is only £26,000. It looks as if house prices are straying back towards dangerously overvalued territory and another property bubble and crash is the last thing Britain needs.
The trouble is, there is not much point in simply warning people that houses are getting too expensive. It didn't work last time around, and it is unlikely to work this time either. You need to do something about it and it is not as if the Bank does not have any tools at its disposal. There are three things it could do to stop a bubble getting out of control.
First, raise interest rates. The Bank's teams of highly trained economists should have figured out by now that if you cut interest-rates to 300-year lows, you run the risk of creating a bubble in most assets and since owning your house is the main investment for most British families, the most likely asset at risk of this is property.
Mortgage debt is cheaper than it has ever been, so it's no surprise people are taking out more of it. At first, 0.5% interest rates were seen as a short-term emergency. Now they're considered permanent and people are responding accordingly.
True, raising rates now might risk choking off the fragile recovery of the last few months. But if the Bank signalled that rates would get back to a long-term normal level of 5% over the next three years, that would make a big difference.
Next, mortgage lending rules could be tightened. The banks tightened their lending standards during the credit crunch. There are now signs they are loosening them again. We are not quite back to the days of the 125%-self-cert-buy-to-let-mortgage, but it is getting easier to borrow money all the time.
The Bank will soon be taking over supervision of the banks as well as control of monetary policy. It could limit loan ratios or insist on higher deposits. Either would restrict the flow of money into the market.
Finally, it could stop feeding the banks cheap capital. The Bank of England has been as aggressive as any central bank in pumping money into the economy in an effort to revitalise growth.
It hoped most of it would find its way into consumer spending and some perhaps into building new productive assets, such as factories or warehouses. Instead, the bulk of it has ended up in property. So long as those taps are switched on, there is little reason to expect anything to change. Turn them off, and the bubble would be stopped.
Warning of trouble ahead is like warning about obesity while running a burger and ice-cream chain. The new Bank governor Mark Carney will need to decide whether he wants a housing bubble to develop or not. And if he doesn't want one, he should act not just talk, and then act surprised when no one pays any attention.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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