‘Financial regulation’. Two words guaranteed to bring relief to even the most chronic insomniac.
It’s safe to say that the new Chancellor’s plans to abolish the Financial Services Authority (FSA) won’t distract most people from the World Cup. And news that the Bank of England is now in charge of ‘macro-prudential regulation’ will hardly be the top talking point in your local pub.
But it matters. And probably much more than you’d think. It could mean some very big changes to our financial lives – in particular to house prices.
I’ll admit to being a bit of a regulation cynic. No one worries about it when all’s well. But when something goes pear-shaped, we often find the regulators were either asleep at their posts, had been watching the wrong thing (literally, in the case of the US regulator, the SEC), or hadn’t been given the right brief in the first place.
The FSA is a case in point. Its job was to regulate the UK’s financial services industry. In other words, to spot little problems before they became big ones – such as a bank about to go bust.
So what went wrong? As Chancellor Osborne said at last night’s Mansion House dinner, “at the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify, let alone prevent”.
In other words, too many people were allowed to borrow far too much money, which in turn created a false boom. This landed both borrowers and banks in trouble when the recession hit.
So now that Bank of England boss Mervyn King has won the battle to become financial regulation daddy, what will the Bank do differently?
More precise details will no doubt emerge later. But here’s the interesting (to me, at least!) bit. The Bank is now wearing two hats. In its new role, it’s been told to prevent another housing bubble. But at the same time, the Bank’s Monetary Policy Committee is in charge of setting bank base rates. These broadly determine the cost of home loan finance.
Britain’s house prices are currently climbing at 10% a year, according to the latest Nationwide survey. The value of the average UK home is within 9% of 2007’s ‘bubble’ peak. Indeed, in parts of London and the South East – which set the trend for the rest of the country – prices have climbed above their old highs.
That sure looks like another bubble forming. But house prices are very sensitive to changes in interest rates. When these have risen in the past, values have tended to stabilise, maybe even dropping slightly.
So to stop Britain’s latest housing bubble inflating further, when can we expect to see base rates being raised again? After all, the cost of living is rising at 3.4% a year, compared with the 2% target, meaning that there shouldn’t be a problem with rate hikes on this score.
Over to you, Mervyn.