Carney Carnage Chronicles
Like missing penalties, drinking tea and listening to The Archers, home ownership is a peculiarly British obsession that is hard to explain to outsiders.
The ratio of house prices to disposable income is uncomfortably wide and Robert Shiller, the economist who famously predicted the great American housing crash, has raised the warning flag. “I worry that what is happening in Canada is kind of a slow-motion version of what happened in the US,” he said last autumn in an interview with CBC news.
‘The most recent figures for high loan-to-value lending show that it is up 56pc in the past year. Householders are starting to find their appetite again.’ Photo: Film Stills
Any politician suffering a little in the polls knows he or she needs only to tickle the public’s home-buying erogenous zones for a general feeling of warmth to flow from the voter to the MP.
At the last Budget, George Osborne reached for the home ownership Viagra when he announced – to widespread surprise – a package of measures under the banner Help to Buy.
An equity loan scheme and state-backed mortgage guarantee programme would encourage more people on to the housing ladder, it was argued. House price inflation has been proceeding, unsurprisingly, at quite a clip ever since, at a time when real incomes remain squeezed.
This can have only one effect, as a glance at the latest data on the average house price-to-earnings ratio for first-time buyers reveals. It is on the way up again and now stands at 4.4:1.
That compares with 4:1 in the depths of the financial crisis in 2008 and 2:1 after the 1990s house price crash, which left millions of homes repossessed and homeowners suffering the miserable impact of negative equity. Its record high is 5.4, an unsustainable figure reached in 2007 before the wheels came off the economy.
Last week, the ratings agency, Fitch, was the latest body to reveal its concerns over the Government’s attempt to pump-prime a housing market that has not gone through the type of price correction normally seen during periods of recession.
In particular, Fitch pointed out that far from increasing the supply of homes – a legitimate policy objective given Britain’s historic inability to build enough of them – Help to Buy is pushing up house prices and creating higher liabilities for the state. In other words, if any of this goes wrong, it will be the taxpayer picking up the tab.
“The second phase of the Help to Buy scheme [mortgage guarantees] will increase margins for home builders and may do the same for banks, while creating contingent liabilities for the sovereign,” Fitch said.
The agency joins the International Monetary Fund, Lord King, the former Governor of the Bank of England, and Vince Cable, the Business Secretary, who have all expressed unease over either mortgage guarantees or lower levels of quality lending.
Their fears are well founded. The latest Halifax survey shows house prices rose by 2.1pc in the three months to July and were up 4.6pc from a year earlier. The number of transactions also increased by 6pc for the first half of the year. Cluttons, the estate agent, predicts that in London prices could rise by as much as 7pc this year as buyers flood into a supply-constrained market.
The buy-to-let sector is also booming as landlords take advantage of higher yields in the rental sector. Figures revealed last week showed buy-to-let lending up 19pc, with more than £5bn extended in the second quarter of the year.
Of even more concern is that the price rises already evident have been sparked by phase one of the Chancellor’s package. Phase two, the far higher-impact mortgage guarantee, does not start until next year.
It is against this background that Mark Carney’s announcements on forward guidance last week should be viewed. In effect, the new Governor told current and potential homeowners that interest rates would remain at rock bottom until 2016. Yes, get-out clauses do exist, but the general public are unlikely to be across the details.
Mr Carney denied that he was in danger of stoking up a housing bubble. “It’s something we watch closely,” he said at the Inflation Report press conference on Wednesday.
“We have to put recent developments in the housing market in context,” the Governor continued. “We still see, for example, mortgage applications are well below historic averages. We see [the] proportion of loans that are high loan-to-value [at] about 40pc, pre-crisis they got up to about 70pc. Valuations are still quite a bit off.”
All that is certainly true – market activity is still at a low ebb and high-debt mortgage borrowers have, until relatively recently, been paying off debt, not taking it on.
The problem is that momentum, once created, is hard to rein in and whatever the signals Mr Carney may send he should never underestimate the desire of the British to take out a mortgage and call a home their own.
As we saw between 2005 and 2007 and in the late 1980s, people will continue to load up on debt for far longer that the evidence suggests is sensible. The most recent figures for high loan-to-value lending show that it is up 56pc in the past year. Householders are starting to find their appetite again.
Mr Carney needs only to look back at his home country of Canada, where he was of course once governor, to see the perils of a housing boom.
There, the ratio of house prices to disposable income is uncomfortably wide and Robert Shiller, the economist who famously predicted the great American housing crash, has raised the warning flag. “I worry that what is happening in Canada is kind of a slow-motion version of what happened in the US,” he said last autumn in an interview with CBC news.
Housebuyers have loaded up with too much debt and now the threat of interest rate increases is concerning everyone. This is a problem for the Canadian economy because housing makes up such a large part of the overall economy. Sound familiar?
House price-to-income ratios are now approaching 5:1, a level reached in the US in 2006 just ahead of the sub-prime crash. In America, after the great correction following the bursting of that particularly toxic housing bubble, it sits at a far more sustainable 3:1. Britain is closer to Canada than the US.
It is, of course, no time to panic. There is still enough slack in the housing market for action from the Bank to ensure a bubble does not expand to threatening proportions.
Mr Carney should re-weight the system so that banks are encouraged to lend to businesses (which is time-consuming) rather than to households (which can be done over the telephone). Sadly, by giving banks a state-backed guarantee, the Government’s Help to Buy programme is only encouraging mortgage lending to households.
Housebuilders themselves are also advertising the Government’s support as if it is a money-off scheme.
But buying a house should never feel like buying a tin of baked beans. Yes, there has been much tightening of the model since the mad days of 2008 and 125pc mortgages and self-certification.
However, memories are short and when it comes to housing the British like nothing better than getting the deal done, measuring up for the curtains and worrying about the consequences at a much later date. Mr Carney should keep a firm hand on the tiller.