Bubble boys

I'm guessing Mark Carney must be behind this:  UK Chancellor of the Exchequer George Osborne is to give regulators (mainly the Bank of England) new powers to restrict mortgage lending, in the hope of preventing the development of a housing bubble. Back when Carney was at his old job at the Bank of Canada, he and the Finance Minister, the late Jim Flaherty, similarly tightened restrictions on Canadian banks, a move that went a long way toward ensuring that the country's economy came through the financial crisis relatively unscathed.

We'll come back to Canada later, but in the meantime, what should we make of Osborne's moves?  It's unlikely that he can do much to curb the eye-wateringly high prices at the top end of the London property market.  That market is largely driven by foreign money, from the Middle East, Asia and Russia among other places, looking for a safe haven away from the prying eyes back home.  Rather, Osborne's (and presumably Carney's) concern is over purchasers of more modest means who may be taking on excessively large amounts of debt. Therefore, the key element of the new rules will be to allow the Bank of England to set a maximum multiple of household income that homebuyers can borrow.

This is not without political downside for Osborne.  Bragging about how much one's home has increased in value is a time-honoured tradition among the English middle classes.  If the new rules really do put a brake on the market, plenty of homeowners will not be happy.  Moreover, the housing price bubble is largely confined to the London area,  or at least driven by London-based money. Potential buyers in other parts of the country may well be angered if the rules mean that they, too, are unable to obtain financing.

There's also the intriguing question of what Osborne's initiative, and Carney's likely role in bringing it about,  may tell us about the course of UK monetary policy.  Carney's attempts at providing "forward guidance" to the financial markets have gone badly, mainly because the Bank's forecasts for growth and employment have turned out to be too low.  Carney has continued to stress that the Bank is in no hurry to start raising interest rates; maybe not, but Osborne's measures may well be a sign that the Bank is starting to think more seriosuly about the problems that may emerge once the tightening cycle begins.  

Meanwhile, back in Canada, the Bank of Canada has just released its Financial System Review, and one of the key risks it identifies is....consumer debt and the overbought housing market.  Despite the much-vaunted success of the Flaherty-Carney measures during the financial crisis,  household debt-to-income ratios remain close to record levels.  The housing market continues to move ahead, with prices up more than 8% from a year ago.  The Toronto and Vancouver media are replete with startling stories of ferocious bidding wars on properties.

It's not clear what Bank of Canada Governor Poloz is going to do about this, not least because the tone of the Review is so different from the "what, me worry?" approach he has taken to monetary policy over the past year.  Maybe the needed action will have to come from elsewhere in Ottawa, perhaps at the government's mortgage insurer, CMHC.  This week, the OECD expressed concern about the overvaluation of Canadian home prices and suggested it was unwise for the government to allow CMHC to provide 100% insurance cover for high-risk mortgages. Neither the banks nor consumers would applaud if that coverage was taken away, but a housing market in which homeowners pocket all the gains, while taxpayers are on the hook for the losses, will always be prone to unhealthy bubbles.

UPDATE, 14 June: It didn't take long for Carney to drop the other shoe.  In a key speech at Mansion House in London on Thursday evening, he warned that interest rates were likely to rise sooner than the markets were anticipating.  Certainly more direct than his earlier, ham-fisted attempts to provide "forward guidance".