How much you spend on a haircut holds the key to maintaining a stable economy in an era of low inflation

Central banks will in future rely less on interest rates to try to stop bubbles

 

Share

The stories are starting to come through about the seemingly odd questions people are being asked if they want a mortgage. Are they a member of a golf club? How much do they spend on a haircut? How much pocket money do their children get? And so on.

These are the result – you might think the rather cack-handed result – of a change in regulation. Whereas in the past a bank or building society looked at the loan-to-value ratio of the mortgage and the income of the person seeking it, now they have a duty of care to try to see that the borrower is being prudent. These lifestyle questions have been triggered by a review by the Financial Conduct Authority, and the aim is the admirable one of trying to make sure that people don’t take out loans they can’t pay back.

The Financial Conduct Authority is not to be confused with the Financial Policy Committee, the new body at the Bank of England set up in parallel to the Monetary Policy Committee. Put crudely, the object of the former is to prevent financial companies screwing their customers, whereas the aim of the latter is to stop them causing a new bubble, and hence cut the chances of going bust. One is the retail regulator, the other the wholesale one.

The two bodies, however, come together in their impact on the housing market, with wider consequences for the economy. If the FCA is successful in making sure that lenders are really careful when they make loans, that will to some extent damp down the house-price boom. That would make life easier for the FPC, which we know is worried about the housing market – or rather, if it isn’t it jolly well should be because you can’t have house prices going up by 11 per cent a year for ever. The Bank Governor, Mark Carney, has been warning about house prices since last August, with zero impact so far.

If the FPC does decide to act, it can force lenders to insist on higher loan-to-value ratios. But that may not have much effect, because most loans are well-covered by the value of the house, with 90 per cent mortgages accounting for only 2.2 per cent of the market. As Capital Economics points out in a note this week, cash transactions account for one-third of house purchases. Does the Help to Buy scheme make matters worse? Well, a bit, but it is tiny in the context of the housing market. Between October and the end of January it helped only 2,572 sales. There are a million home sales a year in the UK.

So it is hard to escape the conclusion that the only sure-fire way of holding down house prices is higher interest rates, and that the promise by central banks to keep money cheap is helping to push them up.

That leads to the great dilemma in central banking here and elsewhere. Economic conditions warrant cheap money. Low (in Europe very low) inflation justifies that policy. But asset inflation everywhere threatens long-term stability. Thus Germany has 0.5 per cent inflation at a consumer level but Berlin property is booming. What should the central banks do?

We will get some more ideas about the Bank of England’s concerns in the new Inflation Report to be published today, but the wider dilemma is highlighted in a paper from the economics team at HSBC, titled The Great Central Banking Revolution. Its central idea is that inflation targeting failed to provide long-term stability, but using macro-prudential policy alongside inflation targeting will help.

This won’t be easy. One of the most effective ways of stopping asset bubbles in the past has been a cap on lending. But thanks to the flood of money that the central banks have created, capping lending will not have as much impact as before – with the UK housing market an example of that. The HSBC team thinks that the effect will be that central banks will in future rely less on interest rates to try to stop bubbles. If that is right, the UK will be a test case.

There is something else. We will move to a society where banks have a good excuse to say no. Of course they will want to lend because that is how they will make their money, but they will be under regulatory pressure to be cautious. The result will be much more like the society of the Fifties and Sixties, where companies that have cash will be much better placed to take investment opportunities than those who have to borrow it. As for individuals, well, if you want a mortgage you will have to present yourself as a cautious, prudent citizen – and maybe give up golf.

Not such a risky business

Risk appetite. This is the expression you hear more and more about these days, and it is trotted out as the explanation for extremely strong stock-market performance, particularly in the US. It is certainly fascinating, when you consider all the bad news that has been thrown out – including the breakdown of relations with Russia – that Wall Street keeps hitting new highs. European shares have been stunningly strong, too, given that recovery has barely begun in much of Southern Europe.

And in the UK? We have a strong recovery, but the global concerns remain. Yet the FTSE 100 index is close to a five-year high and it is possible that the last peak, reached so long ago at the end of 1999, will be breached this year.

But is it really risk appetite, or is it desperation? Do investors want to take on more risks or do they want to escape the very low yields available on bonds and cash? Anything is better than leaving money in a bank.

Of course, it must be a bit of both, but it is hard to identify, at least outside the US, any real desire among investors to take on risk. There are plenty of arguments for caution, including the fact that on most historical measurements shares are pretty highly valued.

There is, however, one further twist. It is that we positively need high share prices to sustain the recovery. Companies need to be able to go to the market for investment funds. They need to improve the position of their pension liabilities. So the authorities cannot afford to allow another market crash. If the Bank of England and the European Central Bank won’t print the money, the Fed will.

It is a dangerous argument. But it is sustaining the markets right now.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Ashdown Group: Data Warehouse & Business Intelligence Co-ordinator

£35000 per annum: Ashdown Group: Required skills include SQL querying, SSRS, u...

Ashdown Group: C#.Net Developer - C#, ASP.Net, PHP, HTML, JavaScript, CSS

£30000 - £35000 per annum: Ashdown Group: C#.Net Developer - C#, ASP.Net, HTML...

Argyll Scott International: Senior Business Analyst- Insurance

Negotiable: Argyll Scott International: Senior Business Analyst - Insurance ...

Recruitment Genius: Property Manager

£25000 - £29000 per annum: Recruitment Genius: This independent, growing Sales...

Day In a Page

Read Next
 

i Editor's Letter: The demise of a Sixties monster

Oliver Duff Oliver Duff
A CCTV camera is seen in front of a large poster opposite in central London  

Home Office is creating more powers to turn everyone into suspects – but leave us no safer

Shami Chakrabarti
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?