Carney in control

June 26, 2014

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Today, Bank of England governor Mark Carney announced two new rules implemented by the BoE to curb the possible risk of a UK housing bubble. Only 15 percent of new home loans made by mortgage lenders can be made at 4.5 times above the borrower’s income. Banks also “must decline loans to borrowers who fail a new stress test that assumes an immediate 3 percentage-point increase in the benchmark rate,” says Bloomberg’s Ben Moshinsky.

Earlier this month, the IMF warned the UK that rising housing prices and low economic growth posed a threat to the country’s economy, although Chief Secretary to the UK Treasury Danny Alexander told Bloomberg earlier this week that “people shouldn’t get carried away with the scale of the problem.”

Fast-increasing property prices in the UK are interesting, says Jeremy Hill, because it’s largely centered in London, and largely driven by foreigners (a quarter of London neighborhoods are unaffordable for 95% of the population). However, “a housing crash in London is not likely to happen absent a simultaneous housing crash in New York, Tokyo, Paris, etc. The BoE knows this and is reacting to the broader sense of the risk,” writes Hill. Further, Robert Peston points out that “much of the London market is being driven by cash buyers – and the Bank has no influence over their behaviour.”

This move is “a reminder that while UK house prices are surging, the flip side of the affordability calculation — wage growth — is the real problem,” says Mark Gilbert. Wages, he notes, haven’t kept pace with inflation at all since the Great Recession, with the exception of a brief period at the beginning of 2014 (which appears to be over, according to this chart).

Just two weeks ago, Carney gave a speech in which he warned that an interest rate hike from the historically low 0.5% “could happen sooner than markets currently expect.” Carney was questioned by the Treasury Select Committee this week and backtracked somewhat. “The exact timing of that [increase in rates] will be driven by the data,” he said. With regard to his forward guidance, MP Pat McFadden told Carney he was acting like “an unreliable boyfriend – one minute hot and one minute cold.” David Keohane quotes Citi’s Steven Englander wondering if “central bankers are actually just messing with us deliberately in order to exert some control on behaviour.” Which might, at least, be comforting. — Shane Ferro

On to today’s links:

Sovereign Debt Problems
Things are going to get really interesting with this Argentina situation - Joseph Cotterill

Alpha
Raj Rajaratnam’s limousine driver is suing him - Courthouse News

Robots
The robots are stealing our jobs, diagnostics edition - Pacific Standard

Billionaire Whimsy
“I wouldn’t have moved for the taxes, but it is an interesting proposition,” says billionaire- Bloomberg
Chen Guangbiao invited 300 homeless New Yorkers to lunch, then only let 200 in -Business Insider

Long Reads
Tyler Cowen interviews Ralph Nader - The American Interest

Unintended Consequences
A herd of hippos that one belonged to Pablo Escobar are ravaging the Colombian countryside - BBC

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