Mervyn King’s house price hypothesis
So no sooner had Britain’s banks pushed forward the begging bowl of further support schemes from authorities to prevent a renewed mortgage famine in 2011, than Mervyn King firmly slaps the suggestion down.
“It is the most generous scheme in the world. It’s more than enough… in the longer-term, banking will be less profitable, but I think this is an inevitable result of this crisis. The Special Liquidity Scheme will not be extended.”
Think that the intricate lattice of government banking guarantees doesn’t affect you? Think again.
The bizarre mid-record-recession house price renaissance enjoyed in the UK can be put directly down to the £185bn SLS, the associated £134bn Credit Guarantee Scheme run by the Treasury, and the £200bn asset purchase scheme colloquially known as quantitative easing.
As King said rather candidly, the point of these schemes was to help prevent depression conditions, and so help inflate asset (e.g. house) prices. Look to page 15 of the inflation report and you will see some concession to the argument made by the banks through a recent Council of Mortgage Lenders report.
The BoE admits that the “cost and availability of funds to replace maturing liabilities will be an important influence on banks’ lending ability.”
In English, the end of the SLS and CGS, will lead to a reduction in the lending power of UK banks.
The only hope would be a return of the famous securitisation market, but as the inflation report acknowledges “it is not clear how strong investor appetite for such securities will be in future.”
Put it all together and you get a picture of asset prices, including house prices being artificially inflated to help prevent a depression (handily occurring before an election), yet that only deferring an inevitable day of reckoning for Britain’s credit addiction a year or so (i.e. after an election).
Are all those people stretching themselves to buy houses right now aware of this?
Does this not suggest the conditions of a year ago, pre-support package, will return over the next couple of years, with predictable implications for house prices.
I put this question directly to the Governor today (about 57 minutes in on the webcast). “No one can forecast asset prices, so I don’t think you can predict that asset prices will fall back,” he said.
“I don’t see why that should in and of itself lead to a change in asset prices, because we all know this problem is there and that’s already reflected in to current asset prices.”
So there we have it. Current house prices, already have factored in, the likelihood of a significant decline in the availability of credit in the coming years, because everyone knows this is coming.
It’s a version of the efficient markets hypothesis. Only I’m not so sure how efficient are our mortgage and property markets.
Tory deficit reduction
King seemed rather cautious on the Conservative suggestions that the Bank of England be actively consulted on the scale of immediate deficit reduction, mentioned repeatedly by Messrs Cameron and Osborne in recent days (including by Cameron to me here).
Mr King said that he “didn’t understand the proposal.” I blogged about why it might make sense last week.
Conservative aides were tonight emphasising that there’s no planned change to the structure of economic policymaking but that a prospective Chancellor Osborne wanted allow room for the Bank to keep interest rates low for as long as possible.
It seems to me that this is a way to provide presentational cover for a flexible interpretation of just how small the Tory 2010 deficit cuts might be.