The Bank and the bubble

The soaring property market is a cause for concern. But Mark Carney has the tools to prevent it over-inflating


The great lesson of the financial crisis is that free-market principles are insufficient when the property market is booming. For it was the excesses of the real estate market in the major economies, particularly the United States but also here and in the rest of Europe, that gave us “sub-prime”, toxic debt and all that followed,  eventually busting virtually every major bank in the Western world. “Never again,” everyone said. 

Not least the Bank of England, which must bear some part of the blame for what went wrong last time round. The Bank’s current caution is justified, and not simply because it is wary of being discovered “asleep at the wheel” twice inside a decade. The Bank is acting to raise loan-to-value ratios and imposing an interest rate “stress test”, under newly acquired powers. It is right to do so – but not because the Bank is the right body to manage the UK’s property market, something of a fool’s errand for a central bank. The point of policy is to prevent damage to the financial system and the wider economy when a bubble bursts. A vigorous housing market underpinned by rising incomes and without reckless lending by financial institutions is something the Bank can and should leave well alone, and let property prices go where they will. That is not the case today.

The market is not supported by strong growth in wages, which have only just edged ahead of inflation. And, while the Great Recession appears to be over, and notwithstanding the return of parts of Lloyds TSB to the private sector, our banks and building societies are still recovering the strength they lost in the crash. They are ill-prepared for any fresh financial onslaught from a property market in meltdown.

That is the direct risk to financial stability. An indirect one arises if households become badly overstretched as interest rates return to normality. That is why it is prudent to ask the banks to make sure borrowers can cope with interest rates at higher levels. While the recent signals on how soon the bank rate will go up have been confusing, the trend is not in doubt.

A return to normality will be something of a squeeze for the most heavily indebted households. Now consider the effect of some unpredictable external shock such as a hike in oil prices, for example. If that happens, unemployment rises and interest rates have to be set high to constrain inflation, tipping many households into negative equity, and leaving them unable to service their home loans, as happened in the early 1990s. That, in turn, would destabilise the banks. It is prudent to make sure that new borrowers can cope with the bad times as well as the good.

Before the invention of these “macro prudential” tools, to use the jargon, the Bank would have had to use interest rates to do everything. Fortunately the Bank can now take action on the housing market and the threat it poses to financial stability, at the same time as it keeps rates at a relatively low level to boost the recovery in the real economy. It has the tools; let us hope the Bank can finish the job.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Volunteer Trustee opportunities now available at The Society for Experimental Biology

Unpaid Voluntary Position : Reach Volunteering: Volunteer your expertise as Tr...

Early Years Educator

£68 - £73 per day + Competitive rates of pay based on experience: Randstad Edu...

Nursery Nurse

£69 - £73 per day + Competitive London rates of pay: Randstad Education Group:...

Primary KS1 NQTs required in Lambeth

£117 - £157 per day + Competitive London rates: Randstad Education Group: * Pr...

Day In a Page

Read Next
Residents of the Gravesham constituency are 10 times closer to what Peter Hain scorns as the “Westminster elite” than are those of Linlithgow and East Falkirk  

Will no one stop the march of localism?

Jonathan Meades
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam