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

KS1 and KS2 Primary NQT Job in Lancaster Area

£85 - £140 per day: Randstad Education Preston: Randstad Education is urgently...

DT Teacher - Resistant Materials

£33000 - £34000 per annum: Randstad Education Group: Technology Teacher (Resis...

Trainee Recruitment Consultant

£20000 - £25000 per annum + Uncapped Commission, 1st yr OTE £30-£40k : SThree:...

Middleware Support Analyst

£45000 - £50000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Day In a Page

Read Next
Protesters rest following pro-democracy protests in Hong Kong  

Hong Kong protests: Is this the coolest and most civilised uprising ever?

Chris Maume
Medical staff members burn clothes belonging to patients suffering from Ebola, at the French medical NGO Medecins Sans Frontieres (MSF) in Monrovia  

The reality of Ebola: Buckets of chlorine in the streets, and no one shakes hands any more

Patrick Jamiru
Italian couples fake UK divorce scam on an ‘industrial scale’

Welcome to Maidenhead, the divorce capital of... Italy

A look at the the legal tourists who exploited our liberal dissolution rules
Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

The vintage series has often been criticised for racial stereotyping
An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

An app for the amorous

Could Good2Go end disputes about sexual consent - without being a passion-killer?
Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

Llansanffraid is now Llansantffraid

Welsh town changes its name, but can you spot the difference?
Charlotte Riley: At the peak of her powers

Charlotte Riley: At the peak of her powers

After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
She's having a laugh: Britain's female comedians have never had it so good

She's having a laugh

Britain's female comedians have never had it so good, says stand-up Natalie Haynes
Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

Let there be light

Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
Great British Bake Off, semi-final, review: Richard remains the baker to beat

Tensions rise in Bake Off's pastry week

Richard remains the baker to beat as Chetna begins to flake
Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

A look to the future

It's time travel fashion at Louis Vuitton in Paris
The 10 best bedspreads

The 10 best bedspreads

Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
Arsenal vs Galatasaray: Five things we learnt from the Emirates

Arsenal vs Galatasaray

Five things we learnt from the Gunners' Champions League victory at the Emirates
Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?