Bank of England Grapples With Strange Kind of Housing Boom

Even by the standards of Britain’s housing market, the announcement a few days ago of a 3.9% May increase in house prices was a humdinger. The Halifax house price index has recorded bigger increases in its 31-year history but not that many. This was its fourth biggest monthly rise, and you have to go back 12 years for anything bigger.

There are caveats. The Halifax index can be a skittish beast, prone to occasional lurches. May’s big rise was preceded by two (smaller) falls. The 2% rise in prices over the latest three months, which translated into an 8.7% rise on a year earlier, showed a lower rate of house-price inflation than some other measures.

Even so, there is exuberance there, which the Bank of England’s financial policy committee (FPC) will respond to later this month. Before coming on to my main theme – the fact that there is something very odd at the heart of this rise in house prices – I should do us all, and the Bank, a favour by opening the lid on the FPC.

The Bank appears to have realised, perhaps a little late, that it has a problem on its hands with the FPC. The monetary policy committee, now 17 years old, is pretty well understood by most people. It meets once a month, decides whether to adjust interest rates (or not for more than five years) or do more quantitative easing. To the extent these things can ever be straightforward, it is.

The FPC, however, is a shadowy body which meets on a quarterly basis. There is the cult of ther amateur about it. The fact that this shadowy body may be about to make decisions that could affect people’s ability to get a mortgage explains the flurry of activity from the Bank, including tweeting photos of the committee and a speech by Richard Sharp, one of its external members. The title of his speech, however, “An experiment in macroprudential management” did not exactly inspire confidence.

The FPC has 10 members, three of which it shares with the MPC – Mark Carney, Charlie Bean and Sir Jon Cunliffe, as well as two other Bank insiders, Andrew Bailey and Spencer Dale. Martin Wheatley of the Financial Conduct Authority is a member, as well as four external members, Sharp, Dame Clara Furse, Donald Kohn and Martin Taylor.

It may be that, by the end of the month, we will know quite a lot more about the FPC. It meets on June 17 and its recommendations, which are expected to include restrictions on high loan to income mortgages, as well as others, with be made public nine days later, when the Bank’s financial stability report is published.

The delay between meeting and announcement is said to be because it is dealing with more complex and nuanced decisions than whether interest rates should go up or down by a quarter of a point. It is, however, a recipe for uncertainty. The Bank can and should do better than this.

Anyway, after all the build-up, the FPC is almost honour-bound to do something on housing. It has, moreover, to get it right. The question is how it, and we, should be reading the market.

Everybody involved in prime central London housing says the market has slowed significantly. Knight Frank, the estate agent, attributes it to high prices and uncertainty over next year’s general election. Other parts of London and the south-east remain strong but are also likely to level off for similar reasons, and because some lenders – Lloyds and RBS – have decided to unilaterally impose constraints on £500,000-plus mortgages.

The really interesting thing, however, is what is happening to activity. Alongside its report of a 3.9% jump in house prices last month, the Halifax noted that transactions had recently fallen (though they were still up on a year earlier).

The monthly numbers for mortgage approvals suggest anything but a housing market awash with cash. The figures, from the Bank of England, showed approvals dropped to just under 63,000 in April, from almost 76,000 in January. Just as approvals were getting into their strike, they have fallen back, and they are an important lead indicator of housing activity. The long run average for approvals – 1993-2007 – was nearly 99,000 a month.

Some of that fall is due to the run-up to the mortgage market review, introduced at the end of April, which disrupted some lending. Some of it may have been the refocusing of the Funding for Lending Scheme away from mortgages, announced in November. The Office for National Statistics, in its latest economic review, notes that net mortgage lending is barely increasing.

A significant factor, also, is the lack of availability of property. This is not, for once, the traditional complaint about not enough new housing, at least not directly. An arguably more important factor, which is pushing prices up even as activity remains well below normal levels, is that existing homeowners do not want to sell.

RICS, the royal institution of chartered surveyors, reports “a dearth” of new instructions to sell, with nine of its 12 regions reporting a drop in properties coming on the market. The other day I saw an estate agents’ window with 40 properties displayed but all but two of them sold.

Why is it happening? Older people looking to downsize appear reluctant to do so, perhaps because the returns they can get on the savings they unlock are so abysmal, and cannot compare with the strongly rising price of the property they own. Instead of being a source of properties for sale, they have become the so-called “bed blockers” of the housing market.

High transaction costs, including stamp duty rates of 3% above £250,000, 4% above £500,000, 5% above £1m and 7% above £2m, may be taking their toll on transactions elsewhere in the market. Expanding families often find it easier, and cheaper, to extend.

The cumulative effect of too little new housing over many years is also a factor, says Simon Rubinsohn of RICS. The tightness of supply damages the market by severely restricting choice. If there is not enough out there to buy and move into, owners will not sell.

So, we have an odd challenge for the FPC. The London market, which has grabbed its attention, looks to be slowing. Elsewhere, the problems in the market do not appear to be driven by runaway mortgage growth but by supply shortages, for both new and existing homes. The Bank cannot do anything about them, as Carney has said. The question, unless it has evidence that the banks under its supervision are taking unwarranted risks, is whether it should be doing anything at all.

This piece is cross-posted from with permission.