The Bank of England's capital problem

Houses The Bank could make it more expensive for UK banks to lend large mortgages

To state the bleedin' obvious, it's bloomin' marvellous that the economy is growing again, blah blah blah.

But stats out this morning show there is still some way to go before we can be confident that the recovery is entrenched, or that it is yielding significant benefits for the vast majority.

So, for example, although we learned last week that in March - on the official figures - prices rose slower than earnings, and thus that living standards might at last be improving for the first time in five years, that gorgeous trend looks to have been (ahem) short lived.

Because in April, inflation blipped up from 1.6% to 1.8% - which compares with March's increase in total pay of 1.7%, and a rise in pay-minus-bonuses of just 1.3%.

So, to tell you what you have already worked out, we are not getting richer, as individuals, at any great rate of knots, and we may in fact still be getting (a bit) poorer.


Unless that is we are lucky enough to live in London and own a house (and here I need to declare an interest, because - oh yes - I live in London and own a house).

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There are two other regions [apart from London] where prices are above the pre-crisis peak: the south east of England, which is now 3.4% above the ante-deluge high, and the east, where the rise has been 3.1%”

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Here is the big thing: according to the Office for National Statistics, London properties are now worth a staggering 25% more than their pre-Crash peak in January 2008.

Which of course gives me - and other members of the London property owning plutocracy - a lovely warm feeling. Except that it is a semi-meaningless rise in price, in that I can't take the money and run, because I have to live here (curses).

And just to rub it in for the rest of you, there is no other part of the United Kingdom where price rises have been anything like as strong.

Localised boom

There are two other regions where prices are above the pre-crisis peak: the south east of England, which is now 3.4% above the ante-deluge high, and the east, where the rise has been 3.1%.

Nowhere else in the UK have prices returned to where they were.

Here is another way at looking at the huge regional disparities in the housing market: London prices rose 17% in the year to March, they rose 5.3% in Yorkshire and Humberside, but only 0.8% in Scotland and 0.3% in Northern Ireland.

So if there is a dangerous boom it is pretty localised, on London - and, to a much lesser extent, the South East in general (prices in the South East rose 6.1%).

Is it such a bad thing that the London property market is red hot?

Well there are a few reasons why it might well be a very bad thing.

First, it means - as the Bank of England has pointed out - that when properties are being bought with debt, with mortgages, the loans are likely to be a huge multiple of the earnings of the buyer.

According to ONS figures, a typical London property is priced at £459,000 and a typical London wage is about £35,000. Which means houses are selling for 13 times typical or median earnings.

Or to put it another way, they are only affordable - if bought with debt - at current historically low rates of interest.


If interest rates were to rise, new property owners might find they could not afford to keep up the payments. And banks that have made these high-loan-to-earnings loans might find they were facing a rash of bad debts and losses.

Second, there is and will be contagion from a red hot London market to the rest of the country. An unaddressed bubble in London will pump up bubbles in adjacent regions, as buyers feel compelled to look for value and affordability elsewhere.

And to be clear, even outside London, the ratio of prices to earnings is high by historical standards: the latest ratio of of national house prices to average (not median) earnings, excluding bonuses, is 10.8 - which is, of course, distorted by the London bubble, but gives you an idea that houses are not exactly cheap-as-chips anywhere.

So if we look at the next hottest market, the South East, and we compare prices with median or typical earnings just in that region, the ratio is a disturbing 11.

In other words, the risk of boom and bust is not focussed just on London.

Third, this is not just about the risk of financial pain for over-stretched homeowners and reckless lending banks.

Build more!

There is also a social cohesion point: London and the South East as a place where only hedge fund managers, investment bankers, Russian oligarchs, Middle East hydrocarbon sheikhs and vainglorious media folk can dwell does not sound like a country fit for heroes.

So what's to be done?

Well the governor pointed out what more-or-less everyone in the UK has known for years, which is that house prices will remain inflationary, unless and until a way is found to increase the supply of new accommodation, either through building more or making it easier to release empty offices and shops for residential use.

But turning on the tap of new homes can't and won't happen rapidly - even if the government is up for it.

That said, the Bank of England has some ability to take some of the heat out of the market, even without putting up interest rates - in that it now has a Financial Policy Committee, that sits alongside the Monetary Policy Committee, which has the power to rein in banks when they are perceived to be lending in a way that could be dangerous and destabilising.

Help to Buy

So at next month's FPC meeting, it would not be a great surprise if the FPC announced that it would make it more expensive for banks to provide loans that are a relatively high multiple of earnings, by increasing the capital charge for such mortgages.

That would mean banks would have to hold more capital relative to such loans, and that would be costly for them, so such loans would become scarcer and pricier for customers.

The FPC might also suggest that the government halve the value of houses, from £600,000 to circa £300,000, that are eligible for the public-sector subsidy under the Help to Buy scheme - which is supposed to help first-time buyers in the pre-owned dwellings market.

However, that would mean bringing forward the official timetable for the Bank of England's review of Help to Buy.

In other words, the Bank of England is not a bystander.

But there are two important caveats here.

First, these powers to curb banks' lending are brand new, and untested. We just don't know how effective they will be.

Second, much of the fuel in the London market is from cash buyers. And the Bank of England has no ability to prevent those buying with their own wonga, rather than debt, paying silly prices.

Which is probably why, whenever I talk to the folk at the Bank of England, they don't exude huge confidence that they can prevent London and the South East from continuing to party until there is the mother of all hangovers.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 262.

    260. Cassandra
    Are you referring to Newton-Le-Willows in your obnoxious, insulting remarks.Where people are probably working as hard as anyone in trying to make ends meet.
    Meanwhile the City of London is once again being bailed out by the rest of the Country after it's latest episode of greed & expropriation of the Nations wealth.

  • rate this

    Comment number 261.

    Casandra @260
    with property"

    Only a phase, of course, but no-one will believe you!

    Given no need to defend as castles, with SENSIBLE systems of maintenance & renovation, and SENSIBLY supported freedoms to extend or rebuild or to move, then renting could be made 'to work', as it MUST if we are to enjoy democracy and its fruits, equality of means in politics & markets, mobility eased.

  • rate this

    Comment number 260.

    The British infatuation with property, or 50 years of economic mismanagement leaving people unwilling to invest anywhere else?
    Building lots of new homes in Salford or Newton-le-Hole isn’t going to affect the London property boom, so let’s stop pretending it is.
    We should just stop expecting to be able to buy a house there. Most people rent in most capital cities. It’s rental costs which matter

  • rate this

    Comment number 259.

    I have the perfect idea, lets do something to regenerate run down towns like Clacton/Margate and Hastings. Lke making it accessible to commute from instead of charging close to £10k a year!

  • rate this

    Comment number 258.

    Control population growth

  • rate this

    Comment number 257.

    "There is no shortage of land to build on with planning permission"

    perhaps you might support this argument with data? I think that there are clear indications to contrary reflected primarily if rapidly increasing value of land which has such permissions (which can now be hundreds of times the value of agricultural land)

  • rate this

    Comment number 256.

    The average mortgage size in London is 270k. A 2% rise will mean another £450 a month. Will people be able to afford that? Of course not and cue house price collapse and another recession. Everything needs to be done to stop any further price rise and stabilise the market, let wages catch up over a period of 5-10 years.

  • rate this

    Comment number 255.

    People in this country are so creative, why not help them build their own home?

  • rate this

    Comment number 254.

    There is no shortage of land to build on with planning permission, the big building companies have lots of it. The problem is that they are hesitant to build more when they see the bursting bubble looming.
    They learned from the last financial crash, unlike Osborne and the Building Societies....

  • rate this

    Comment number 253.

    Thinking in the wreckage.

    'Trilemma' (on combinations from domestic rate control, capital freedom, exchange rate defence) has counterpart in cross-border freedoms affordable for individual born into 'democracy in one country'. Secure equal-income earner / beneficiary, secure in other benefits & pension, necessarily without conventional 'ownerships' & savings. Allowances on emigration? Buy-ins?

  • rate this

    Comment number 252.

    Surely the whole point is that the entire financial crash and recession was based upon an unsustainable housing market and people being unable to afford their mortgage payments when rates rise.We are going to have the same problem in a few years. Osbornes an idiot, the building companies don't want to saturate the market and make prices fall.The government needs to build or allow councils to do so

  • rate this

    Comment number 251.

    The government is stoking the property bubble to quick start the economy, instead of doing it by embarking on wide scale programme of house building consequently creating jobs. It has no intention of dealing with the problem. Tory voters in general have no problem with rising prices They are making huge profits Its the working classes that struggle Buy a house on a zero hour contract? Dream on

  • rate this

    Comment number 250.

    Joe @196

    Tragic the assertion by those who tolerate unfair money-discrimination on pay-day, going home to bemoan the consequences for self and family and society; and to campaign (against the tides of money that drive our football-press and yah-boo circus politics) for things called 'rights', appeals to the charity of money-addicts, lottery winners, thieves, extortionists, each (resentful) other!

  • rate this

    Comment number 249.

    We started up five years ago in that time several others have started up their own businesses offering similar services but the pool of potential clients has not grown larger, the margarine is just being spread thinner and its local people not immigrants starting up. What I see is a massaged housing market and massaged unemployment, it’s all about elections.

  • rate this

    Comment number 248.

    A pre election property boom fueled by political policy.

    Who would have thought that would have happened.

  • rate this

    Comment number 247.

    I was shocked to read this morning that Building Societies are offering mortgages of 4 or 5 times salary, don't they ever learn? I suppose the societies feel they've nothing to lose since the tax payer will bail them out again.
    I thought the Government was going to sort out the financial industry..

  • rate this

    Comment number 246.

    Truth @228
    "just target
    specific demographics"

    Targeting? We live - even 'the rich' - as the atomised, not just spread along a spectrum but insecure, impacted not just by insecurities of career but by those of health & family, & wider risks such as familiar to diversifying investors. Equal citizens can shape the market, NOT vice-versa. No to waiting for Cooked @229 group-think on 'less children'.

  • rate this

    Comment number 245.

    There seems to be two sides to the problem, population & number of houses. The government could solve both, by cutting immigration & stopping subsidising children and building affordable housing. Without action, neither will be addressed by the markets, because neither is in the markets best interest.

  • rate this

    Comment number 244.

    Rising house prices mean votes, especially from older home owners (which are more likely to vote.

    Hence governments' interest in pumping housing markets ahead of elections.

    Governments have a huge amount of measures they can take heat or cool the market and ALWAYS chose the former. Only when bubbles reach truly unsustainable level does the market restore things to normal.

  • rate this

    Comment number 243.

    PLAN: Weak pound helps our businesses export more, driving recovery, pay and jobs.

    CATCH: Our best-selling 'export' is London property which international (and UK) rich fancy as an investment with status and buy on favourable exchange rate.

    RESULT: Property boom in London instead of business investment and jobs. Boom continues until our real economy catches up.


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