Is bubbling property really the greatest threat?

London estate agent

The governor of the Bank of England has put on record his concern that the greatest risk to the UK's recovery are the red-hot conditions in the London property market, the potential for contagion to the rest of the country, and the associated risk that banks may be lending recklessly.

Clever clogs Lloyds, that most politically astute of banks, has responded by announcing that if you want to borrow more than £500,000, you will only get the loan if its value is no greater than four times the income of your household.

"Wah?" you may say, if you are of a certain age. "When I was a lad, you were lucky to get a loan of three times income."

Which only goes to show that some pretty racy mortgages are being written by banks and building societies in the London and south east.

Perhaps the most amazing thing said by Lloyds yesterday is that this new constraint would have an impact on 8% of its London home loans business (and see my piece on last night's News at Ten for more on all of this).

Bloomin' 'eck.

So to repeat what I said yesterday, it would be a bit odd if the Bank of England's new Financial Policy Committee did nought next month to take some of the heat out of the residential property market.

Anyway, this is a long pre-amble to a tangential point, which is that not all Mark Carney's colleagues at the Bank regard the bubblelicious housing market as the most worrying possible sinkhole on our journey to the sunny uplands of renewed prosperity.

Which may surprise you a bit. But they take the view that after years of stagnation, property prices were bound to get a bit racy, once we all got a sniff of economic recovery. But that the Bank has important new tools to insulate banks and the wider economy from extreme housing-related shocks.

Hmmm. We'll see. The Financial Policy Committee's new tools are untested. Gawd knows whether they'll be used in a timely and appropriate way, or whether they'll have adverse unexpected consequences.

But I suppose the bigger point is that British homes aren't the only asset currently looking a bit toppy, in the jargon.

I am prohibited from recounting the contents of private conversations with Bank brains on all this. But I can give you this resonant quote from Charlie Bean, the retiring deputy governor of the Bank of England, who last night gave a valedictory speech at the London School of Economics.

This is what Mr Bean said: "Implied volatilities in many financial markets have been at historically low levels for some time. Together with low safe interest rates in the advance economies, that has underpinned a renewed search for yield and encouraged carry trades [where investors borrow cheaply to invest in assets offering a nominally higher return, but where that return is not necessarily higher when underlying risk is taken into account].

"Taken in isolation, this is eerily reminiscent of what happened in the run-up to the crisis".

Or to put it another way, those controlling the world's great pools of money believe the world is a much safer place than it really is, and are taking foolhardy risks with their investments.

In fact, the Bank's internal analysis shows that investors are behaving more irrationally and exuberantly even than perhaps implied by Mr Bean - the volatility of a raft of the world's most liquid and important assets, from shares, to currencies to government bonds, is lower even than at the peak of the boom before the devastating crash of 2007-8.

So as and when any of the following possible accidents materialise - exacerbation of turmoil in Ukraine, a hard financial landing in China, cack-handed end of the era of free money in the developed economies, inter alia - "we may yet encounter a few potholes".

Or so Mr Bean puts it, perhaps euphemistically.

One of the great possible sources of future instability is the great overhang of government and official debt acquired by the central banks of the big rich economies through the money-creation exercise known as quantitative easing.

Mr Bean signals that the Bank of England will not wish merely to sit on the £375bn of gilts or UK government bonds it has bought, and see that debt mountain gradually shrink as the Treasury repays on the assorted due dates.

If the Bank were to do that, the unwinding of quantitative easing, the withdrawal of the new cash from the economy, would take around 50 years - which would be too long, he seems to think.

So at some point, he says, the Bank of England will start to flog some of this stuff back to investors.


Well it ain't going to be very soon. Because there is a risk that investors and the market would react quite adversely - pushing down the price of debt, and increasing implied interest rates pretty sharply.

There could, therefore, be an over-reaction, in which the price of money would rise sharply, to the detriment of the wider economy.

Which is why Mr Bean says the Bank cannot start to sell its gilts till the official interest rate has been raised to a high enough level, such that the Bank could make an emergency cut in it, as a form of evasive action.

But in spelling that out, Mr Bean has telegraphed to hedge funds and other investors the rules of a potentially lucrative game - the losers of which could be all of us. In that the rational thing for any investor to do would be to dump gilts in size as the Bank's policy rate was raised, to pre-empt and perhaps even deter possible gilt sales by the Bank (such that the investors could buy the gilts back at a depressed price, in the expectation of a bounce).

Lucky Mr Bean is, of course, exiting the crucible of all this potential future mayhem before we find out whether the Bank of England will show wisdom and sensitivity in disposing of the debt and withdrawing £375bn of cash from the economy, or will emulate his famously accident-prone namesake.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 20.

    I live in SE London. In the last 10 years we've seen a property boom whereby residential and office buildings have sprouted like mushrooms after rain. Most of them are empty. One building belongs to RBS, who are now trying to sell it following redundancies and it stands empty. There are flats starting at 2.5 Mio that were finished 4 - 5 years ago. You never see any light or other life in them.

  • rate this

    Comment number 19.

    On the other hand, two hundred years ago, there were probably people who were worried about what would happen when we started to repay the National Debt.

    Somehow, difficult problems like this always seem best handled some time in the future after all current participants have retired and preferably died.

  • rate this

    Comment number 18.

    At last someone pointing out that the BofE QE is an accident waiting to happen...something which the BofE and a certain Mervyn King denied for years

  • rate this

    Comment number 17.

    Raise interest rates

    They is already enough accommodation for the population otherwise there would be millions on the streets! Longer term we do need more houses to give choice to the population. Higher interest rates even by 1% now, will lower prices, forcing people to abandon the buy to let market (no capital gain and higher repayment) and allow middle earners people to buy.

  • rate this

    Comment number 16.

    As a nation, we can actually afford serious increase in government housebuilding investment to meet national needs & also to prevent overheating & excessive housing inflation, including rents.

    UK foreign aid is officially approx £11 billion, but unofficially & factually it is approx £14 billion & growing, when £3+ billions of taxpayer in work subsidies to immigrant workers are included.

  • rate this

    Comment number 15.

    Property prices, low wages & the mass sale of all our public services/assets.

    Doesn't matter though, keep the masses arguing amongst themselves abuot foreigners & an EU referendum that'll never happen & they wont notice the rest.

  • rate this

    Comment number 14.

    nope leaving EU with other countries following suit is the greatest risk to the British economy

    But its ok, UKIP released a poster saying its all fine and the EU was actually the problem, this poster was on the tv and everything so it must be true...

  • rate this

    Comment number 13.

    The UK problem is that mortgage interest is not long-term fixed. Conversely annuity rates are fixed for life..
    Put the 2 together. Force retirees to fund annuities with their pension pots. Use the pot as house purchase capital, repaid by inflation-linked long term mortgages which then fund inflation-linked annuity payments.

    Put simply, retire, fund house for kids, live off interest.

  • rate this

    Comment number 12.

    In 1989, interest rates on mortgages were around the 13% mark. Millions ended up in negative equity as no one could have foreseen the disaster that befell the property market causing misery for new buyers. Today we have no interest on savings, so property is seen as the only 'saving' system that offers returns. If you offer a new savings product not based on houses, you may get proper prices.

  • rate this

    Comment number 11.

    The only major industry in this country now is banking and finance. Successive governments have destroyed just about every other core industries that this country had. Most of our car plants are foreign owned, ship building has all but gone, mining destroyed. Our energy even Fracking has gone to the French, We haven't just put all our eggs in one basket, we've run out of Chickens.

  • rate this

    Comment number 10.

    If the Bank of England hold on to the £350 billion and the government keep paying the bank the interest on the gilts then over time repay the £350 billion to the bank, what's not to like? Government take up to 50 years to pay back debt, bank receive interest which Treasury will probably get, I must be missing something. Or,to put it another way, I don't now what I'm talking about!

  • rate this

    Comment number 9.

    So, unwinding quantitative easing might prove to be a little bit more difficult than creating it eh?

    Is the Pope still a Catholic by any chance?

  • rate this

    Comment number 8.

    Further to #1, we also have inflation that is too high for prevailing economic conditions & a globalised economy. We really need to be unpeeling costs that we have built into Britain over the last 45 yrs. If we do not, then our economic future is very uncertain & is highly likely to be unstable.

    Interesting that yesterday's inflation nos. were not discussed here. Attributed cause was very strange

  • rate this

    Comment number 7.

    Lest we forget.. Are we all that stupid to travel down the same road ?

  • rate this

    Comment number 6.

    House prices MUST increase at about half the inflation rate to prevent another banking collapse crisis & allow our economic recovery to continue. A sudden massive fall in house prices (which will happen if prices continue to increase at the current rate) will create a UK wide problem that will severely impact on every single one of us. Double the interest rate may help to reduce price increases.

  • rate this

    Comment number 5.

    Is bubbling property really the greatest threat?

    No, not if it is competently managed, which means taking the excess out of the SPECIFIC demographic that is CREATING the inflationary boom bubble, combined with further government investment in building homes to meet citizens needs.

    But I doubt government will invest more, prefering instead to use the money buy voters with tax cuts

  • rate this

    Comment number 4.

    What happened to the earlier blog ? Too many UKIP supporters dialling in eh ?

  • rate this

    Comment number 3.

    #1 Housing apart, we spend too much, dont save enough, unemployment is too high, tax system is outdated, prosperity is limited, inequality increasing & too many work for the State.


    In UK and EU the state spending more than 40% of GDP is viewed as a virility symbol. Cutting back the state to a max of 1/3 of GDP is hard and requires difficult political choices but is necessary

  • rate this

    Comment number 2.

    No, our membership of the EU is.

  • rate this

    Comment number 1.

    No, just as prior to 2007 there were many factors involved in the crash, many abound now & are the same. Appears we have learnt nothing. HS2 epitomises the head in the sand capabilities of the current crop of politicians.

    Housing apart, we spend too much, dont save enough, unemployment is too high, tax system is outdated, prosperity is limited, inequality increasing & too many work for the State


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