Bank of Englandâs Mark Carney dogged by fears of U.K. housing bubble
One of Mark Carneyâs first goals when he took over as Governor of the Bank of England in July was to build confidence among businesses and consumers that they could count on low interest rates being around for a while.
Mark Carneyâs new challenge â reality
Is Mark Carneyâs halo starting to slip?
Welcomed as a conquering hero when he took up duties as Governor of the Bank of England two months ago, Mr. Carney is for the first time facing a British public (and media) that has begun to question his actions, even disagree with him.
Very quickly he began explicitly laying out his plan to keep the rate at super-low levels. In other words, if ever there was a time to borrow, itâs now.
In central banker speak thatâs called âforward guidanceâ and Mr. Carneyâs an expert. He helped pioneer the strategy during his stint as Governor of the Bank of Canada from 2008 to 2013, and economists say it was a key reason this country mostly sidestepped the recession that came on the heels of the financial crisis.
But this time around, things arenât quite going as Mr. Carney planned. The British are borrowing all right; trouble is, it seems to be mostly homebuyers.
According to data released on Monday by Britainâs Office for National Statistics, U.K. house prices which took flight this year have now surpassed the vertigo-inducing levels achieved in early 2008 as rock-bottom-interest rates inflated a bubble that promptly collapsed a year later, causing enormous pain across the country.
The bubble is getting a boost from a controversial program that will sound familiar. The so-called âHelp to Buyâ scheme provides incentives to potential purchasers, especially those who might not qualify for a bank mortgage.
The first phase launched in the spring provided provided buyers with interest-free loans. The second phase, which kicked off this month, enables buyers to access to government-backed mortgage insurance as a way to access cheaper rates, not unlike the insurance offered by the Canada Mortgage and Housing Corp.
One could argue that such policies are having the desired effect as the U.K. economy is broadly doing better than at the start of the year.
But for many, the price tag on the recovery is simply too high.
Last week, AntĂłnio Horta-OsĂłrio, the chief executive of Lloydâs Banking Group and one of Europeâs top lenders, publicly warned that government policy is fueling a dangerous housing bubble.
Mr. Horta-OsĂłrioâs comments, delivered in an interview with the Financial Times, came a week after similar statements from the International Monetary Fund.
While it would be unfair to lay all of the blame for the policies on Mr. Carneyâs shoulders, it is interesting to note that many of the factors now in play in the U.K. housing market were very much in evidence in this country during Mr. Carneyâs tenure at the Bank of Canada.
Indeed, Mr. Carney garnered much international attention back in the turmoil of 2009 for pushing the bank rate down to 0.5% and letting the world know that he had no plans to lift it off the ground any time soon.
At the same time, the CMHC dramatically hiked the amount of mortgage insurance it was underwriting while another program operating under the Business Development Bank of Canada enabled lenders to sell nearly $70-billion of home loans back to the government.
The strategy worked brilliantly, at least in the short-term.
At a time when many banking activities had come to a standstill in other countries, Canadian banks were doing gangbuster mortgage business. Long story short, the flow of credit to Canadian consumers and businesses didnât dry up and the economy quickly recovered.
But it was a recovery built on real estate borrowing by consumers and one of the unintended consequences is that consumers are now buried under record debt. National house prices have generally been rising since the early 2000s, with the trajectory steepening especially since 2010, prompting warnings from both Finance Minister Jim Flaherty and Mr. Carney, prior to his departure to the Bank of England.
Is Canada going to regret its real estate mania? Will Britain? The jury is still out.
But whether itâs recovering from a financial crisis or kickstarting an economy, Canadaâs rockstar central banker seems to have a simple solution â unleash the consumer.
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Same song, different country.
While Canada survived thanks to a recovery in resource prices (the housing boom was an added benefit but the country would have survived without it), the UK is running out of North Sea oil. And, without resource revenue, the UK does not have the wherewithall that Canada has.
Carney is a one trick pony who came into power in Canada when debt levels were low and resource prices high, except for a brief fall. It was easy to “save” the country and Australia and New Zealand survived without low rates and QE. However, the UK is a different economy and should be handled differently, but economic theory does not have that much flexibility.
Whaddaya Say?