Thursday, 5 April 2012

BoE warns on mortgage limits

The housing market in Britain is not stable.  It is artificially maintained overvalued.  The gov and regulators should remove the barriers that keep it overweight with 25% extra flab on UK average, and perhaps as high as 60% overvalued in London, where all the trouble is centred.  

The issue is not on credit (access, LTV, rates, etc).  The issue is on the supply side.

More, larger houses means people would afford a better standard of living.  They will spend more in the economy.  The debt and deficits should go down.

The households are spending unbelievably disproportionate amounts of their incomes on mortgages (or rising rents) and every day more on non-discretionaries, eg energy, petrol, schooling.  Another article in the FT says the housing market "picks up" by some 2%.  Good news?  I would say a sobering proof the disastrous housing policy (or lack of) is alive and kicking.  

Put your seatbelts on and assume the bracing position.

BoE warns on mortgage limits

    The power to limit mortgage borrowing for households should rest with the government, not unelected regulators, the Bank of England’s top official for financial stability has warned.
    The BoE’s Financial Policy Committee drew criticism last month when it declined to ask for powers to limit loan-to-value ratios – which cap the amount mortgage holders can borrow against the value of their property – because they feared such a step could provoke a political backlash.
    “If you want to contain [economic] bubbles you have to be able to stop people or companies borrowing too much . . .  But, lacking the courage to do this directly, the FPC wants to achieve the same end by subterfuge,” said Peter Sands, chief executive of Standard Chartered, in an opinion piece in the Financial Times.
    Bank insiders had been shocked by the criticism and in the Financial Times on Thursday, Paul Tucker, the deputy governor for financial stability – who is among the frontrunners to succeed Sir Mervyn King as governor next year – defended the FPC’s position on not reintroducing “selective capital controls”, last seen in the UK in the 1970s.
    “Outright bans on households taking out loans with high LTVs – including banning families borrowing from outside the UK financial system – would, in the view of many of us, be a matter not for the FPC but for government to pursue directly,” Mr Tucker said.
    Rather than creating caps on borrowing, the FPC had instead called on the Treasury to give it the power to discourage lending to specific sectors, such as property, by increasing the amount of capital banks must hold against these loans.
    Mr Tucker noted that, unlike limits on loan-to-value ratios, raising capital requirements for banks “would not cut across lenders’ judgments on the creditworthiness of individual borrowers”.
    However, research by the BoE and the FSA finds that evidence on the effectiveness of ‘sectoral capital requirements’ is mixed. Sir John Gieve, a former deputy governor for financial stability at the BoE, said: “There comes a moment in every boom when extra capital requirements don’t seem to carry much weight. Limits on loan-to-value ratios have been effective elsewhere.”
    Gerard Lyons, chief economist at Standard Chartered, said: “Most crises are driven by real estate booms. And limits on loan-to-value ratios are by far the best measure to deal with them.”
    Central bankers in Hong Kong credit LTV limits with helping their banks avoid the ill effects of a 40 per cent fall in property prices. The FSA also found a link in the UK between high LTV ratios and defaults between 2005 and 2009. Canada has also gradually tightened mortgage borrowing since 2008. However, unlike in Hong Kong, the finance minister and not the central bank is responsible for policy.
    The FPC recognises LTV limits have advantages over other measures, including that their use would send “a clear and strong public signal of emerging risks”.
    However, the committee has also argued that setting caps would be difficult because the “sustainable” level of property prices is unclear.
    The housing market in Britain has remained relatively stable despite strong growth in prices in the run-up to the credit crunch. Mr Tucker’s point that it is for the government to decide on borrowing caps highlights unease among the unelected technocrats at the BoE, who have been criticised for their lack of accountability and for seeming to favour particular groups.
    The BoE Monetary Policy Committee is already on the receiving end ofpensioners’ anger over the effect of quantitative easing on their savings.
    Richard Barwell, a former Bank official and now an economist at RBS, said: “The flak the bank is getting from pensions would pale into insignificance next to the barrage of criticism it will get if it starts constraining the flow of credit to households.”

    No comments:

    Post a Comment