Wednesday, 11 July 2018

Reinventing the wheel, although it's a good wheel to reinvent.

This IPPR report has some good stuff in it, in among the waffle (as you can see from the excerpt below). The recommendation that was given most attention (favourable and unfavourable*) is that house prices could/should be stabilised by capping loan-to-value and loan-to-income ratios:

Currently, the FPC achieves its objectives via controls on loan-to-value and debt-to-income ratios allowed by mortgage providers, and controls on the proportion of mortgages in bank portfolios. The FPC recently implemented a loan-to-income ratio of 4.5 for 15 per cent of new mortgages, even though the Bank of England recently estimated that around 11 per cent of mortgages exceeded this ratio in 2015 (Chakraborty et al 2017).

Implementing targets that bite requires giving the FPC a strong mandate to limit asset price inflation. Since house price inflation is different in parts of the country, the FPC’s guidance should be regionally specific. There is a risk that a target for house price inflation, tackled through macroprudential tools, could inadvertently increase inequality, by reducing access to credit for the  poorest borrowers**. To mitigate this risk, we recommend that the exact nature of the target, and the tools the FPC be given to achieve it, be determined jointly by the Bank of England and the Treasury, and be put out for consultation before being implemented.

House prices are also determined by other factors, not least the supply of housing, and therefore adoption of the target would need to be accompanied by a much more active housing policy. This might include public housebuilding, changes to planning policy, and curbs on overseas purchases of UK homes (Ryan-Collins et al 2017). The FPC should be able to request that the government do more with housing policy if it judges that it will be unable to meet its target through macroprudential tools alone.

It is also worth noting, however, that recent research has shown that the level of mortgage lending is the primary determinant of house prices (Ryan-Collins et al 2017).

Well duh, this is what building societies did until the 1980s. And it worked a treat, getting rid of these limits was a key part in stoking the Home-Owner-Ist bonfire. The report doesn't emphasise enough that this is all tried and tested IMHO.

* The nutters at CapX are sticking to the Faux Lib orthodoxy that it's all about supply and lax lending has nothing to do with it, despite the report going to some length to provide evidence to support their opposite and correct explanation.

** They are undermining their own case here. Credit bubbles are an arms race. By being allowed to borrow more, every borrower ends up worse off, rich and poor alike. It is quite possibly the case that higher income borrowers will see bigger absolute savings than lower income people (in fact, mathematically that must be true), but so what? Overall equality (taking earnings and housing wealth together) will increase, and higher income and lower income aren't competing to buy the same houses anyway.


mombers said...

A million monkeys in a million years with a million typewriters could not come up with such utter drivel as that CapX article...

mombers said...

Re Houston, Mark I'm sure you could dig up some figures on downtown prices - I'm pretty sure they will have gone up more than average

Lola said...

So instead of reverting to the tried and tested Building Society rule book pre 1986 (policed by the societies themselves with no state bureaucrats involved) they are proposing a load of new bureaucratic controls and interventions.

This is simply a bureaucrats job creation scheme.

Mark Wadsworth said...

M, ta, I don't get the Houston reference.

L, that is the puzzle. Was the building society code of conduct self imposed and voluntary?

Lola said...


In my view the demutualisation frenzy brought on by the 1986 Act was the real turning point. Essentially a current generation of members were given all the wealth built up over many years. capital that was there to make it possible for societies to whether fluctuations in savings rates. I voted against all the demutalisations in the societies of which I was a member on that principle.

Also prior to 1986 there were some ratios that worked well. BS could not lend more than 75% LTV without insurance. A mortgage indemnity policy. Loans were at max 3.5 x 1st earner plus 1 x second earner. These were (are) tried an tested ratios. That's all gone by the wayside now.

Mark Wadsworth said...

L, ta for link.

The important bit bs this:

"1986 New Building Societies Act. Gave wider powers to societies in the field of housing and personal banking services. Established the Building Societies Commission as societies' regulator."

Lola said...

MW. Yes. BS were 'special'. That specialness was destroyed by that Act. It just made them into more banks.

The purpose of BS is home finance financed by savers deposits with a small amount of market operations - PIBS for example. The mortgages financed by deposits bit is crucial. It engenders a savings culture ( a Good Thing) and it restricts the supply of house purchase credit (another Good Thing). As mutuals BS generally offered higher savings rates than banks and lower mortgage rates. Banks generally lent to riskier borrowers.

(Mind you in the bastardised (non) economics of punk Keynesianism we now endure savings are bad and credit - aka debt - is good).

This is why I a slightly conservative libertarian. These tried and tested arrangements should not be lightly abandoned.

Ben Jamin' said...

@ Mom

Typical to cherrypick Houston, without mentioning it's footprint, therefore the costs that lower HPs, it's not so nice location vs East and West coasts, it's relatively high property taxes, and germane to the CapX piece, it's very strict mortgage lending rules relative to the rest of the US etc, etc, etc

Mark Wadsworth said...

BJ, sure, we're agreed on that. But larhe towns in Texas show the same steep increase towards the centre as any other town, with skyscrapers in the middle.

Mark Wadsworth said...
This comment has been removed by the author.
Mark Wadsworth said...

L, but my question is, were the building society lending limits self imposed or legal limits under some Act or other?

Ben Jamin' said...

@ MW

What do you think of Sam Dimitru criticising the idea of mortgage caps as a solution to housing issues, then citing Houston as an example of what we should be doing, not knowing Texas has the strictest mortgage LTV rules in the USA?

Thought you might appreciate that clanger.

Mark Wadsworth said...

BJ, I didn't know about Texas LTV rules, so I wouldn't have noticed.