UK House Prices and Macro-Prudential Policy July 2014

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Question 1: Do you agree it is time for more robust policy action to prevent a build-up of excessive housing-related risk?

 

 

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Question 2: When housing-related risk is deemed excessive from the viewpoint of financial stability, do you agree that the correct response is to deploy macro-prudential tools, leaving interest rates focused on the needs of inflation and aggregate real activity?

 

Summary

How should UK policy-makers respond to potential dangers to the economy from the housing market? As this survey reports, a majority of respondents to the fourth monthly survey of the Centre for Macroeconomics (CFM) think that house price dynamics do pose a risk to the UK’s recovery; and that macroprudential tools rather than traditional interest rate policy should be deployed to deal with this risk.

Coincidentally, while our survey was open the Bank of England’s Financial Policy Committee (FPC) announced its first macroprudential interventions to prevent the build-up of housing related imbalances.[1] The FPC recommended that no more than 15% of a lender’s total number of new mortgages should be at or greater than four and a half times borrowers’ income and that an affordability test should assess whether borrowers can afford their mortgages if Bank Rate was three percentage points higher.

How bad is the threat from the housing market?

The Office for National Statistics estimates that UK house prices have increased by 9.9% in the year to April 2014, as compared with the CPI (consumer price index) inflation rate of 1.5%. Many observers have identified these large increases as posing an emergent threat to the sustainability of the current UK recovery. For the International Monetary Fund, ‘a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks’ and as a result, ‘more policy action is warranted.’[2]

Several members of the Bank of England’s Monetary Policy Committee have publicly voiced similar concerns. Other observers, however, emphasise the uneven geographical distribution of the price rises (the increase in prices was 6.3% outside London and the southeast) and the fact that the growth in household debt remains quite low compared with pre-crisis levels (lending to individuals rose 1.6% in the year to April). This month’s first question asked respondents if developments in the housing market have already reached the stage where policy action is justified.

Q1: Do you agree it is time for more robust policy action to prevent a build-up of excessive housing-related risk?

Summary of responses

A clear majority of our survey respondents agree with the question. 32 of the 46 experts on our panel provided responses. 72% of them said that they agree or strongly agree (82% when weighted by self-reported confidence), while 22% say that they disagree or strongly disagree (6% neither agree nor disagree).

As usual, the respondents provided a wealth of stimulating commentary to accompany their responses. Several of the respondents who agree cite the need to avoid a repeat of 2008. For example, Michael Wickens (York) cites the risk of ‘creating the conditions of the US sub-prime crisis by encouraging borrowing on the cheap that is not sustainable when, as expected, interest rates are raised before long’; and Luis Garicano (LSE) lists ‘multiple signs that the housing market is, yet again, overheating, including the extremely high level of price increases; the low levels of affordability; and the proliferation of very high loan-to-value mortgages’.

Respondents who disagree counter that ‘rather than on house price inflation,… the focus needs to be on the level of house prices’, which in most areas of the UK is still depressed compared with 2007 (Michael McMahon, Warwick). Similarly, ‘net mortgage lending has been close to zero and the stock of lending to the UK real estate sector is still well below pre-crisis levels’. This is an argument against action because ‘the main conventional and macroprudential instruments … would target lending and leverage, which do not seem to be the main cause of the rise in housing prices’ (Ethan Ilzetzki, LSE).

Both those who agree and those who disagree often cite the need to remove structural bottlenecks on the supply side (such as some features of building regulation), as well as the need to phase out policies that artificially boost the demand for housing (such as Help to Buy). But those who agree think that as long as such distortions persist, ‘it is sensible for the Bank of England to take action to limit people from taking excessive exposure’ (John Driffill, Birkbeck).

Macroprudential policies versus Bank Rate

Whether or not one agrees that action is currently needed to cool the housing market, a separate question is what should be done if and when developments in the housing market are judged to constitute a threat to financial stability. The UK policy framework has recently been enriched with the creation of an FPC endowed with a macroprudential responsibility to make directions and recommendations to the PRA (Prudential Regulatory Authority).

Among its various tools, the FPC has the power to set bank capital requirements and it can force banks to tighten underwriting standards. Some view such macroprudential tools as substituting for the traditional monetary policy tool for the purposes of financial stability, allowing for a ‘targeted’ response to specific financial risks while interest rate policy can continue to focus on the inflation target and the needs of the broader economy.

Others feel that the FPC and its powers are untested and ultimately there is little or no substitute for interest rate increases to nip asset price-debt spirals in the bud. The second question asked our experts for their views on this debate.

Q2: When housing-related risk is deemed excessive from the viewpoint of financial stability, do you agree that the correct response is to deploy macroprudential tools, leaving interest rates focused on the needs of inflation and aggregate real activity?

Summary of responses

A smaller majority of respondents agree with this question. 34 of the experts provided responses, with 53% (both weighted and unweighted) agreeing or strongly agreeing, 27% disagreeing or strongly disagreeing (29% when weighted) and 21% (17% when weighted) neither agreeing nor disagreeing.

Among the experts who agree, Chris Pissarides (LSE) points out that ‘interest rate changes have large impacts on the prices of other assets, many more productive than the housing stock … and they are read as giving signals of future macro policy. A single market, even one as important as the housing market, should not be allowed to dictate policy vis-à-vis this important policy tool’, while Simon Wren-Lewis (Oxford) exhorts us to ‘look at Sweden and Norway for examples of costly, and not obviously effective, attempts to use interest rates to restrain house prices. It seems crazy to use an instrument designed to manage the excess demand for goods to try and manage asset prices in one particular market’.

In general, many of our experts concur that ‘when there are two objectives … it is better to use [two] policy tools’ (Gianluca Benigno, LSE). But Wendy Carlin (UCL), who neither agrees nor disagrees, says that ‘such a neat division of tools for targeting the housing market and the business cycle is unlikely to be possible.’ Sushil Wadhwani (Wadhwani Asset Management), who disagrees, notes ‘that, in general, using a combination of tools to hit multiple targets is preferable to purely assigning a single instrument to a single target. In this particular case, … the impact of using interest rates AND macroprudential tools on the all-important house price expectations is likely to be much greater than just relying on the macropru tools’.

On a similar note, Michael Wickens (York), who strongly disagrees, points out that ‘The demand for housing is affected by the cost of borrowing and the availability of credit. The former can be affected by interest rates and the latter by macroprudential policy. Therefore both financial tools are relevant. Moreover, housing is a major channel through which conventional monetary policy works.’

Irrespective of whether they agree or disagree, many experts stress the lack of previous track record of macroprudential regulation, so that ‘interest rates … should be kept as a backstop to act against asset price rises if the macroprudential tools turn out not to work well’ (David Cobham, Heriot-Watt).

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[1] http://www.bankofengland.co.uk/publications/Pages/news/2014/094.aspx.

[2] From the 6 June 2014 ‘Concluding Statement’ on the 2014 Article IV Consultation. 

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How the experts responded

How bad is the threat from the housing market?

Participant Answer Confidence level Comment
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Agree Extremely confident
A lot of the new demand must be foreign cash buyers (e.g., large increase in prices and transactions mainly in London and small increase in debt) and this type of demand is volatile. It could cause large fluctuations in the housing market and in monetary policy that can have harmful effects on UK residents and on UK macro stability
Wendy Carlin's picture Wendy Carlin University College London Strongly Agree Confident
Martin Ellison's picture Martin Ellison University of Oxford Disagree Confident
John Driffill's picture John Driffill Birkbeck College, University of London Agree Confident
The tendency for property prices to rise and rise in the UK, and for housing to be expensive, is a bad thing. There seems to be disagreement about the causes, but the effects of planning laws preventing construction are very likely an important element. Taxation is another factor. It would be great if a way could be found to stimulate much more construction, especially in existing towns, and especially in the South East and around London where prices are highest. The market needs to be flooded with housing and the prices halved. Meanwhile, it is sensible for the Bank of England to take action to limit people from taking excessively high loans.
Patrick Minford's picture Patrick Minford Cardiff Business School Strongly Disagree Extremely confident
The UK housing market is some 30% below its peak in terms of real house prices. In terms of estimates of equilibrium levels it is gradually converging on these from well below. Monetary policy should be concerned with the general economy; intervening in particular markets is distortionary. Even if there is a social objective to build more houses, the right way to achieve this is to allow real prices to rise to encourage greater release of land and building activity. Issues of individual ability to service future mortgage payments are best left to the lenders and borrowers to decide, especially as many young people in this market have high human capital.
Andrew Mountford's picture Andrew Mountford Royal Holloway Strongly Agree Extremely confident
Rick Van Der Ploeg's picture Rick Van Der Ploeg University of Oxford Strongly Agree Confident
House prices are getting out of kilt and signs of a bubble are reapppearing. Stop subsdizing demand and start bilding much more homes.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Disagree Confident
While 10% house price inflation on a continuous basis would create problems, the current high level of prices follows three or four years of little growth. Moreover, some leading indicators suggest the house price inflation rate will slow considerably in coming quarters. It is hard to see how such little increase in lending can constitute a build up of significant risk. While more robust policy may prove necessary in time, I think it is hard to conclude that we have reached that time already.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Neither agree nor disagree Confident
Given the regional distribution of the increase in house prices, it is not obvious that there is an excessive housing related risk. In my opinion another dimension to consider is the build-up of private debt since an excessive increase in house prices coupled with high private debt, would make the private sector vulnerable to shocks like interest rate increase. In this sense preventing this build up could be important in an environment in which nominal interest rate could increase later in the year.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Agree Not confident
The increase in UK house prices is troublesome and a nontrivial risk factor given that the recovery of the UK economy has only just started and its continuation is far from certain.
Jonathan Portes's picture Jonathan Portes KIng's College, London Agree Not confident
The UK housing market is clearly a source of structural problems in the UK economy: now is no exception. However, it is very difficult to assess at any one time whether it is genuinely a macroeconomic problem, and if so what to do about it.
Michael McMahon's picture Michael McMahon University of Oxford Disagree Confident
Rather than focus on house price inflation which is typically expressed as relative to 12 months ago, I think the focus needs to be on the level of house prices. Recovering house prices have likely played an important role in rebuilding the household balance sheet and therefore played an important part in the consumption recovery. The regional distribution is also important. Within London, there are boroughs in which real house prices are about double what they were in 2006. In other parts of the country such as Coventry, real house prices, despite house price inflation picking up in the last 12 months, remain below the 2006 level. So while it is important to monitor the developments in the UK housing market, I believe that care must be taken not to act too aggressively, too soon in an attempt to target house prices. The focus must remain on the medium term risks to household activities and, of course, financial stability.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Agree Not confident
With essentially fixed supply, but an absence of sharp increases in rents, it may be possible to explain much of the recent increase in prices as a consequence of expectations that real interest rates will remain low for some time. However, there is also evidence that sustained increases in asset prices often have some 'froth on top', caused by unrealistic expectations. So on balance some restraint would be prudent. The argument that 'it is only London' seems weak. In the past, house price cycles have always started in London.
David Cobham's picture David Cobham Heriot Watt University Strongly Agree Very confident
There may be some lags between house prices in London and elsewhere, and even some special factors in London, but we should be sceptical of the argument that This Time is Different. The house price rise makes clear the failure of policy since 2010 to bring about any 'rebalancing' of the kind that we all talked about after 2008, and the risk that we end up with a futile cycle of debt and asset price inflation leading eventually to a bust.
Paolo Surico's picture Paolo Surico London Business School Strongly Agree Confident
Alan Sutherland's picture Alan Sutherland University of St. Andrews Agree Not confident
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Strongly Agree Very confident
Francesco Caselli's picture Francesco Caselli London School of Economics Agree Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Disagree Confident
Net mortgage lending has been close to zero and the stock of lending to the UK real estate sector is still well below pre-crisis levels. The main conventional and macroprudential instruments that the Bank of England might consider would target lending and leverage, which do not seem to be the main cause for the rise in housing prices. They would moreover put further downward pressure on lending to businesses, which is still flat--following several years of decline--despite the recent pickup in economic activity.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Agree Confident
More robust - to change expectations - but not very robust. Already signs the market is slowing somewhat.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Disagree Confident
Andrew Scott's picture Andrew Scott London Business School Disagree Confident
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
Weaning people away from their addiction to property market as an asset class, perhaps their only asset, will not be easy. But reforms to both supply (housing building) and demand (bank lending and taxes) may help. We do though need to move very carefully as the distributional effects arising from reform in the property sector are likely to be large.
John VanReenen's picture John VanReenen London School of Economics Strongly Agree Very confident
The government should abandon it's foolish Help to Buy scheme which is merely increasing equilibrium house prices. It needs structural reform of the planning system to make it easier to expand housing in the South East
Silvana Tenreyro's picture Silvana Tenreyro London School of Economics Agree Confident
This is the right time for the Financial Policy Committee to use macro prudential policies to prevent a housing crisis.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Agree Very confident
There are several risks in current policy. One risk is excessive house-price inflation in the South East, but less elsewhere at present. Another is creating the conditions of the US sub-prime crisis by encouraging borrowing on the cheap that is not sustainable when, as expected, interest rates are raised before long.
Luis Garicano's picture Luis Garicano London School of Economics Agree Confident
There are multiple signs that the housing market is, yet again, overheating, including the extremely high level of price increases; the low levels of affordability (worse than in all other comparable countries and almost as bad as in the hight of the 00s bubble) in spite of unprecendently low interest rates which suggest affordability could get much worse; and again the proliferation of very high LTV mortgages. The UK must learn from the recent financial crisis and take early action to prevent a new financial crisis.
David Smith's picture David Smith Sunday Times Agree Very confident
Action is needed but it is important that it is properly targeted on the overheating parts of the market and does not prevent a continued and gradual housing market recovery elsewhere in the UK
Morten Ravn's picture Morten Ravn University College London Neither agree nor disagree Very confident
House prices are lower than their pre-crisis level in all regions apart from London and the outer metropolitan area. In the latter of these, house prices are now about their pre-crisis level while London prices have risen sharply. Similarly, house prices relative to earnings of first time buyers have dropped in all parts of the UK apart from London. This would seem to indicate that while intervention might be needed for London, a policy intervention that would impact on the rest of the UK is perhaps not called for and could set about unwarranted effects. One way one might design such an intervention is through the taxation of short term capital gains on housing. I also believe that any policy intervention must rely on sound economic analysis of the determinants of house prices and the impact on UK households. Such analysis should form the basis for the analysis of the likely impact of policy interventions.
Tony Yates's picture Tony Yates University of Birmingham Agree Confident
Yes. I think that the increment in risk this time, compared to previous times when we have seen comparable increases in house prices, is less, since standards have already tightened a lot [no more self-reporting income], and LTV ratios have fallen a lot too since before the crisis. But it seems that further action might be necessary.
Marco Bassetto's picture Marco Bassetto University College London Agree Very confident
It is time to scrap help to buy, a program that distorts prices and whose potential cost to the taxpayer is underappreciated. Beyond that, it is probably time for monetary policy to move, but I am less confident about this.
Costas Milas's picture Costas Milas University of Liverpool Agree Confident
Nationwide reports house prices since 1952. In 2014Q1, annual house price inflation stood at 9.2% (compared with the 8.1% average of the last 62 years). So, a bit of difference (albeit small) there. Although London house prices are "taking off" at an annual average of 18% (twice as much as the historical average; Nationwide provides regional data from 1973 onwards) house prices in North, North West and Yorks&Hside are also growing strongly (but still remain 1-2 percentage points below their historical growth rates). What happens in real terms? In 2014Q1, UK real house price growth (adjusted for RPI inflation) grew at an annual average of 6.6%, well beyond the long-run average of 2.6%. This is the highest growth (in real terms) since the last quarter of 2004 (when annual real house price growth “hit” 10.4%). So, YES, we should be worried about house prices.

Macro-prudential policies vs Bank Rate

Participant Answer Confidence level Comment
Kevin Daly's picture Kevin Daly Goldman Sachs Strongly Agree Very confident
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Strongly Agree Extremely confident
Interest rate changes have large impact on the prices of other assets, many more productive than the housing stock and on the value of sterling and they are read as giving signals of future macro policy. A single market, even one as important as the housing market, should not be allowed to dictate policy vis-à-vis this important policy tool.
Wendy Carlin's picture Wendy Carlin University College London Neither agree nor disagree Confident
Such a neat division of tools for targeting the housing market and the business cycle is unlikely to be possible but macroprudential tools linked directly to housing should be used when housing-related risk is deemed excessive.
Martin Ellison's picture Martin Ellison University of Oxford Neither agree nor disagree Confident
John Driffill's picture John Driffill Birkbeck College, University of London Strongly Agree Extremely confident
This one is a no-brainer, surely. The financial institutions need to be prevented from taking on too much exposure to a fall in property prices. Decisions that appear rational to individual institutions are unlikely to be in the public interest; external restraints are needed. And individual borrowers should not be able to take on loans that they are likely to be unable to service: it encourages speculative investment that imposes costs on other people.
Giancarlo Corsetti's picture Giancarlo Corsetti University of Cambridge Agree Confident
We should recognize by now that the most apparent feature of crises involving financial distress and debt-deleveraging is their length: no large deflation followed by a return to normality; rather, a protracted period of persistently large output gaps. With a protracted slowdown, the transmission of monetary policy may be erratic: the channels through which it operates are not fully understood. The same applies, even more strongly, to the macropru instruments. In this scenario, the separation between conventional monetary policy and other instruments (including unconventional monetary policy and macro pru) is a good guiding principle, but we need to be aware that it will be constantly challenged.
Patrick Minford's picture Patrick Minford Cardiff Business School Strongly Disagree Extremely confident
Macro-prudential tools, by which I take it meant intervention in particular markets for lending by creating restrictive rules of engagement, are distortionary of market outcomes. They therefore cause welfare costs. General control of money and credit is the role of monetary policy. It may well be that merely looking at an inflation target is inadequate, since inflation expectations have turned out to be very strongly anchored by the very fact of inflation targeting; monetary policy should be concerned also with the growth of money and credit. By paying attention to this monetary policy should make additional action by macro-prudential tools redundant. Even at the zero bound for the safe interest rate money creation remains a tool of general monetary policy; thus it is hard to see a suitable role for macro-prudential tools.
Andrew Mountford's picture Andrew Mountford Royal Holloway Neither agree nor disagree Extremely confident
Tax policy should be sufficient
Rick Van Der Ploeg's picture Rick Van Der Ploeg University of Oxford Agree Confident
Tools such as limiting the amount that can be borrowed as fraction of income would be helpful too. Same hols for limiting interest only mortgages.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Disagree Confident
My answer is because it depends on what one thinks is causing the excessive risk. If there has been a loosening of credit supply conditions, then macro-pru tools seem appropriate to influence supply. But if there is a high demand for mortgages because the cost of borrowing is held artificially low then just relying on a supply response may create further distortions. In this case deploying macro-pru tools and interest rates together would be more appropriate.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Agree Confident
When there are two objectives (macroeconomic stabilization and financial stability), it is better to use different policy tools for different targets. Interest rate would be proper for macroeconomic stability while macro-prudential tools should address financial stability concerns. The problem is that we, as economist, know very little about the interaction of these policy tools and the extent to which macro-prudential regulations is effective. We still lack a framework to study and understand the interaction between macro and financial stability and the complementarities among different policy tools
Wouter Den Haan's picture Wouter Den Haan London School of Economics Neither agree nor disagree Not confident
The effect of particular macro-prudential policies is very uncertain. We have neither solid models nor empirical studies to guide us. As long as the recovery is far from certain, it would make sense not to use bank rate increases, but to adopt macro-prudential policies such as those proposed by the Financial Policy Committee at its June meeting. But it may very well be that these are not effective and the Bank of England may have to seriously figure out how to use one instrument (bank rate) to ensure both financial stability and the continuation of the recovery.
Jonathan Portes's picture Jonathan Portes KIng's College, London Strongly Agree Very confident
Macroprudential tools are largely untested in the UK. However, it is clear interest rates alone are far from an ideal instrument to deal with housing-related risk; and there are good reasons on empirical and theoretical grounds to prefer macroprudential instruments.
Michael McMahon's picture Michael McMahon University of Oxford Agree Confident
I agree to the extent that specific housing-related risks are better targeted using less blunt macro-pru tools. However, I do think that there is a role for standard monetary policy tools to contribute to reduced housing demand as part of any broader attempts to reduce demand in the UK economy in order to control inflation.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Strongly Agree Very confident
Look at Sweden and Norway for examples of costly, and not obviously effective, attempts to use interest rates to restrain house prices. It seems crazy to use an instrument designed to manage the excess demand for goods to try and manage asset prices in one particular market. If macro-pru does not work, try targeted fiscal policy measures.
David Cobham's picture David Cobham Heriot Watt University Disagree Very confident
Macroprudential tools are untried and untested, while we think we know what we are doing with interest rates, so they should be kept as a backstop to act against asset price rises if the macroprudential tools turn out not to work well. More importantly, the Bank of England should commit (should already have committed) to use interest rates in this way if necessary, so that the knowledge of that feeds into asset price expectations and therefore outcomes.
Paolo Surico's picture Paolo Surico London Business School Strongly Agree Very confident
Alan Sutherland's picture Alan Sutherland University of St. Andrews Agree Not confident
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Strongly Disagree Extremely confident
I think that,in general, using a combination of tools to hit multiple targets is preferable to purely assigning a single instrument to a single target.In this particular case, i believe that the impact of using interest rates AND macroprudential tools on the all-important house price expectations is likely to much greater than just relying on the macro pru tools. Moreover the macr-pru tools we have are new and untested,while we know much more about the efficacy of interest rates.These, and other relevant arguments are discussed in greater detail in my ccontribution tot he LSE "Future of Finance" volume.
Francesco Caselli's picture Francesco Caselli London School of Economics Agree Very confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Neither agree nor disagree Not confident
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Agree Not confident
Macropru best but as yet unproven. If house prices were a signal of economic strength would need to use interest rates. They are at present mainly a response to a rapid easing of credit.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Agree Very confident
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Neither agree nor disagree Confident
Whilst macro-prudential instruments, if properly designed, may help prevent both excessive movements in asset prices and limit the wider economic consequences that can arise from financial instability, it is not clear that we understand their likely impact well enough yet to employ them in a precipitous manner in response to a current policy problem. If we observe a current boom in asset prices, it tells us that policy has failed in the past.
Andrew Scott's picture Andrew Scott London Business School Strongly Agree Extremely confident
John VanReenen's picture John VanReenen London School of Economics Agree Not confident
Silvana Tenreyro's picture Silvana Tenreyro London School of Economics Strongly Agree Very confident
Unlike interest rate policy, macro prudential tools can be effectively tailored to address the specific risks faced by the housing market.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Strongly Disagree Very confident
The demand for housing is affected by the cost of borrowing and the availability of credit. The former can be affected by interest rates and the latter by macro prudential policy. Therefore both financial tools are relevant. Moreover, housing is a major channel through which conventional monetary policy works.
Luis Garicano's picture Luis Garicano London School of Economics Agree Confident
The Bank of England should make use of its macroprudential policy tools to eliminate or reduce distortions that facilitate highly leveraged purchases of housing by households (which are often based on a crazy UK-only ponzi rationale: "all must climb the housing ladder") and aim to facilitate instead the provision of credit to productive business activity. This should include the imposition of caps on loan to value ratios and higher floors on downpayments. The return of the 95% LTV loans should be unconceivable after the disaster of the last few years, and yet its return has been abeted by government policy (help to buy), showing that politically costly lessons are never learned. An important symbolic first step (which could counter the expectations of one way bets) would be publicly eliminating the extremely misguided housing subsidies introduced recently, including specially the mortage guarantees in the "help to buy" scheme. The existence of this scheme is the best proof that we have learnt nothing from the financial crisis and that booms and busts in housing exist because that is what governments, and their voters, choose. Policy makers in the UK must look to other countries and learn the painful lessons once and for all.
David Smith's picture David Smith Sunday Times Disagree Very confident
In theory the correct response is to use macro-prudential tools to target the housing market. In practice, exuberance in the housing market is likely to be associated with stronger growth and rising general inflationary pressures, so macro-prudential will have to be used in conjunction with a gradual tightening in monetary policy.
Morten Ravn's picture Morten Ravn University College London Neither agree nor disagree Very confident
I believe that focusing monetary policy on inflation and activity and macro-prudential policy on the financial risks is the right design. However, it has to be emphasized that there are strong interactions - changes in interest rates impact on financial markets and macro-prudential policy interventions will impact on savings and investment and therefore on inflation and aggregate activity. The same is the case for fiscal interventions such as the one that I pointed to above. Thus, the policies need to be strongly coordinated and their spill-overs need to be recognized.
Tony Yates's picture Tony Yates University of Birmingham Disagree Not confident
The steer we get from current literature on use of monetary policy and macro pru tools is that both should be used. Monetary policy is a weak and inefficient tool to quel a housing boom, but it would ideally tighten a little. I also think there are doubts, relative to these modelling studies, about the speed and efficacy with which macro pru standards can be changed from one period to the next, so monetary policy may have to fill in on that account, since speed and implementation are not issues.
Costas Milas's picture Costas Milas University of Liverpool Disagree Confident
Would macro-prudential policy work? From a statistical point of view, growth of house prices “Granger causes” (i.e. precedes) growth of mortgage debt; the opposite is not true. Indeed, this was also acknowledged by Ben Broadbent, External MPC Member (back in a March 2012 speech). This suggests to me that any macro-prudential measures to restrict the growth of mortgage debt and put a lid on house prices would be ineffective. So, to the extent we are worried about house prices, we should be looking at raising interest rates. With this in mind, would it not be much more effective to merge the Monetary Policy Committee (MPC) and the Financial Policy Committe (FPC) since their duties largely overlap?
Marco Bassetto's picture Marco Bassetto University College London Strongly Disagree Very confident
Macro-prudential tools should always be in place, and it is important to ensure that banks remain well capitalized even in the event of a major housing correction. However, heavy-handed intervention in the mortgage market is reminiscent of the credit controls of the 1970s, whose record of maintaining economic stability was poor. Rationing quantities is a poor substitute for properly adjusting the relevant price (the interest rate).