Now of course all the discussion is about house price bubbles and when base rates will rise from their historic low of 0.5%. When they do rise, potentially in early 2015, Mark Carney used two very positive words to describe how it will go – slow and gradual – debunking the pundits predicting chunky whole percentage point rises.
We can never rule out the unexpected, and mortgage rates have already started to rise – the average rate rose from March to April, 3.72% to 3.80% – partly because of forward market rates. The guidance from Threadneedle Street is helpful though, at least in terms of the lender management of rate shock.
The other message coming loud and clear from the Bank is that eyes are firmly fixed on the housing market. Is it overheating? Are we at the point of justified house price hysteria? Are we facing unsustainable growth in household indebtedness which could undermine financial stability?
These are huge questions and there is no single answer. At the UK level, property transactions and mortgage lending are both up – the number of mortgage loans rose 25% in Q1 this year compared to last. However, both transactions and lending are still running below the long run average. Let’s not forget net lending in 2006 was £110bn. The forecast for 2014 is £17bn, just 15% of pre-credit crunch levels.
At the BSA conference earlier this month Douglas McWilliams, executive chairman of the Centre for Economics and Business Research, expressed his view that new house supply would rise from circa 170,000 to nearer 400,000 units a year by the end of the decade, mending the supply/demand disparity that is driving price increases.
In the meantime we await the publication of the Financial Policy Committee’s next Financial Stability Report on 26 June. For my money I expect to see some use of the Committee’s macro-prudential toolkit, probably an increase in the stress test rate. They have the capacity with other tools for some fine-tuned application – down to regional or even postcode level.
I would urge caution in the use of these untested interventions. They could well lead to unintended consequences in a diverse market. For example, the risk none of us should ignore is damage to that non-economic factor, consumer confidence.
Paul Broadhead is head of mortgage policy at the Building Societies Association