Emailed in by Lola from FT Adviser, subject line 'FFS'.
The Bank of England would expect to loosen its mortgage affordability rules if the UK experienced strong house price growth, it has said.
In a working paper titled Modelling the Distribution of Mortgage Debt, out this week (July 3), the central bank tested the regulation of affordability in two different scenarios — a ‘business as usual’ one and one it named the ‘upside scenario’.
So they not think about what they have just written?
You could just as well turn that first part round and state:
If the Bank of England loosens its mortgage affordability rules, the UK will experience strong house price growth.
To all intents and purposes, credit availability and house prices (aka 'The Housing Crisis') are the same thing.
Saturday, 21 December 2019
Surely the Bank of England is not that stupid?
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“The Bank of England would expect to loosen its mortgage affordability rules if the UK experienced strong house price growth….”.
Translated:
Given a house price bubble, the BoE would exacerbate it.
That’s the best joke I’ve heard so far this Xmas holiday. BoE: please, please keep them coming.
RM, spot on.
The policy takes its cue from house prices and so for the policy to be internally consistent they would at least have to have a technique for factoring out the effect the policy has on the house prices.
Din, yes, but the question answers itself.
House prices are a high multiple of rents; rents are a fraction of wages; so house prices are a lower multiple of wages; and mortgages are house prices minus deposit.
If we think that 3 is an acceptable mortgage-to-income multiple, then no further adjustment is required.
Wages go up 10%, house prices go up 10% and three-times income is also 10% higher than it was, so people can borrow 10% more anyway, even if mortgage-to-income remains fixed.
In this pantomime season this is very apt. Could they be that stupid? All together now - "Oh yes they can!"
https://www.bankofengland.co.uk/working-paper/2019/modelling-the-distribution-of-mortgage-debt
The paper states that it is a working paper representing the authors view and not the views or policy of the Bank of England, that it is a work in progress published to elicit comments and further debate.
I read it and see no mention of the bank of England loosening its affordability rules.
However it does not acknowledges the link between BOE interest rate policy and regulation policy and prices and similarly states that With rising prices and static income levels it is expected that commercial banks would raise the LTI allowed for mortgage applications, and "adjust their affordability criteria in order to avoid a reduction in mortgage approvals or a loss of market share"
It states that without pointing out the positive feedback nature of that on prices, positive feedback being the term to describe a process that increases the thing that starts it.
Din, different people in the BoE put out different bits of research, some of it brutally honest and some of it pure propaganda.
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