Should the Bank of England step in to cool the housing market?

I’ve written here before about the ways in which the Bank of England could control the housing fledging recovery/boom/bubble (in the north, the south and London respectively) if it felt like it here and here.

The upshot is that the Financial Policy Committee can now control the amount of credit that goes to any one sector at will. This is entirely new territory for this generation of central bankers, and was little understood until quite recently – the press has only just begun to discuss it.

The problem is that it’s pretty politically charged stuff. Our elected government clearly wants house prices to rise – and fast. If it didn’t, it wouldn’t be persevering with Help to Buy – it would by now at the very least have cut the threshold for borrowing under the scheme from the price of a nice house in the booming south (£600,000) to the price of a nice house in the faltering north (more like £300,000).

Given this, for the Bank of England to impose new affordability criteria on top of the new Mortgage Market Review rules; to force the banks to hold more capital against mortgages; or to simply insist on limited lending all round, would look, as the FT puts it, rather like “giving with one hand and taking away with the other.”

So will the (technically) fully independent Bank of England use any of its powers? If it does it will need to act pretty fast. Research, says the FT, shows that if the authorities “act too cautiously” they tend to end up slowing rather than preventing bubbles.

Since 2009 the Bank of Israel has taken nine separate ‘macroprudential‘  measures to cool its housing market. But house prices are still 25% above their historical averages relative to incomes. Why? It might have something to do with limited supply and a base rate of 0.75%.

  • mr clyde

    …No. Anyone with a problem with the housing market should write to their MP and tell them they will vote for the party that abolishes stamp duty and replaces it by removing the CGT relief on principal residential properties.

    • Rambler

      Two issues:
      1. Someone owning their own house would be in the same boat as those investing in buy-to-let, I don’t see that as fair.
      2. Most people would not understand the need to track all of their costs incurred in buying, renovating and improving the house to use to reduce CGT. Again unfair against those who invest in buy to let.

      The best way is for the BoE to use macro policies such as reducing the LTV available in certain Post Codes, etc. although this has no impact on cash buyers, which is why I have also been in favour of the Chancellor introducing CGT to overseas investors and introducing higher stamp duties, closing company purchase loopholes, etc.

      • mr clyde

        Fairness has nothing to do with it. Buying a house and living in it is consumption. Buying a house and letting some-one else live in it, is investment. It is a principle throughout the tax system of this country that tax relief is available for investment. If I buy a Ferrari and drive it I get nothing – if I buy a Ferrari and lease it out I can claim reliefs – same difference. As for your second point, are you really suggesting that home-owners should be protected from the disadvantage that they are too stupid.

  • tot777

    As long as the supply of money/credit is not tied to the amount of savings/deposits, house prices will continue to rise, at least in nominal terms. The BoE/FPC talking tough on the housing market, whilst keeping rates at 50bps for over 5 years is laughable. Just raise rates if you want to cool the housing market. Never mind tinkering with the supply of credit.

  • Greg

    FIAT money needs to be controlled but there are also fundamental flaws with our “housing market” which need to fixed – simply building more homes, raising interest rates, introducing rent caps or limiting immigration will not solve our housing crisis. We need radical policies – a change in taxation – instead of taxing buildings we need to be taxing the land those building sit upon – our taxation should be encouraging efficient land use, development of new homes and deterring the buying of homes simply to store wealth or make money – many of which remain empty or under-used. If we had a Land Value Tax that could be used to control house price inflation without raising interest rates and risking deflation and a possible triple-dip recession. The fact that we have a politically appointed governor of the BoE means that he’s unlikely to do anything to stop house prices from rising before May 2015.

  • Ellen12

    I agree with you in that the state of the Fiat currencies are at the root of all asset price manipulations and resource misallocations that the FED, and others, ‘too big to prosecute’ culture has unleashed this on us. The specific problem with housing is that it is not just a commodity or precious metal, but it involves people at every level, right down to those who work for minimum wage. Everyone needs to be homed in order to be able to function and survive and a genuine free market economy would lead to a real price discovery. But the disconnect between what people earn and the cost of a home could not continue without ongoing state intervention, which in turn relies on more taxes, grows the state bigger and underwrites the risks for those who invest in housing, as opposed to those buying their own home. Just as you said, Greg. Tenants and taxpayers paying off mortgages for landlords. And that is the price we are paying for going large on turning housing into nothing more than an investment vehicle where our own Government and Central Bank decide the optimum price they need and limit supply or stimulate demand to get this price. So, Should Central Bank step in to cool the housing market? They are already in the thick of it. My suggestion is that they step out and allow the money supply reflect the value of GDP, stop suppressing interest rates, and if that mean their friends at the bank are no longer ‘Too big to prosecute”, than, so be it.

  • GFL

    Surely restricting supply is also a huge white elephant in the room. We should auction green belt/protected land directly to the public, let people build their own houses!

    I can think of many areas that already have good infrastructure with an abundance of land.

    I not saying we should build all over the country side, far from it, we just need to open up a fair small percentage of protected land. For example there is LOTS of land in zones 4, 5 and 6, already close to transport links.

    • Greg

      I agree – the Government should compulsory purchase land allocated for housing at agricultural prices (plus some compensation) and then auction off to developers and self-builders, using the money to build new council homes and to pay off National Debt.

    • Ellen12

      There is another big elephant in the room that very many other countries are on top of, but not us. Hong Kong will not allow people from Britain just to buy up their property as investments. We, too, really need to seriously restrict foreign buyers especially in London. We could find ourselves increasing supply only to find foreign investors buying these up also. While we have people living like vagrants in the UK because of a dysfunctional housing market, must be stopped from buying any more. Those foreign investors, and I mean those that live abroad, who do own property in the UK already should be forced to have the properties occupied. Instead of introducing mansion tax, which will often penalise people who continually contribute to the Treasury coffers, introduce a punitive ’empty property tax’, to encourage those who neither let or live in their property to sell it to someone who will use it. Also, there is no good reason why a foreign investor should not pay CGT on profits made here.

      • Greg

        Second homes in the UK also need to be considered – many “honeypot villages” are like “ghost towns” in the winter forcing up house prices for locals and causing local shops and pubs to be no longer viable. A Land Value Tax might work but we should consider special taxation for second homes and property investments – particularly those bought to park money and never be lived in.

    • robin

      If we freed up planning rules, the practice of land banking would disappear overnight.

      We would finally build on the land that has already been earmarked for development.

      Or put another way, if we could build on the green belt, we would start building on brownfield sites in excellent locations throughout London and ironically we would not build on the green belt.

      The nimbyist green paranoia is really just feeding the fortunes of the land bankers.

  • Vince

    I’ve written this before, and I know it doesn’t please everyone, but I still think the HMRC needs to allow CGT rollover for buy-to-let investors.

    The problem we have is that BTL investors have mostly bought property in the ‘first time buyer’ bracket (affordable as a 2nd property). They are deterred from selling to reinvest later in a larger property because the CGT payment means they can’t afford to even buy back what they’ve just sold, let alone trade up.

    Therefore they hold onto it for ever, and probably gear up on it to borrow against another property. Hence lots of first time buyer property is taken out of circulation.

    If HMRC were to allow the CGT to be rolled over (like a business asset, or holiday let) into the next property, then landlords would be more inclined to sell. HMRC wins too because the eventual CGT liability when the larger property is sold is greater than that of the smaller property, and would receive more stamp duty payments because of more transactions taking place.

  • Merryn
  • Merryn

    A nice reminder from David Smith in the Sunday Times that the macro prudential policies the FPC is now grappling with using (nor not) aren’t new. There were controls on hire purchase up until 1982 and from 1973 to 1980 the corset (or more officially the supplementary deposits scheme) controlled credit in the UK.

  • Merryn

    And for those interested in how the corset worked there is an explanation here (a bit like the Japanese window policy) and here