"Mortgage rules eased as Bank of England scraps affordability test stokes the flames in the run up to the next big crash in 2025-26"

From The Independent:

Mortgage borrowing rules have been eased by the Bank of England making it easier for thousands of potential homebuyers to get on the property ladder.

It will not make it easier (i.e. cheaper) for first time buyers, it will just force them to borrow larger sums to pay higher prices for what they would have bought anyway.

The affordability “stress” test forced lenders to assess whether people applying for a mortgage would be able to cope if interest rates rose to 3 percent.

The Bank of England said that the change should not be seen as a “relaxation of the rules”, adding that a number of other measures still in place “ought to deliver the appropriate level of resilence to the UK financial system, but in a simpler, more predictable and more proportionate way.” The test was introduced in 2014 following the 2008 financial crash and was designed to stop reckless lending to people who could not afford it.

But hey, let's allow reckless lending again, now that what happened fourteen years ago is fading from memory. It's like banning guns, seeing gun crime fall and then legalising them again on the basis that gun crime is low.

Another rule, which is still in place, limits most new mortgages to a maximum of 4.5 times a borrower’s income. The Bank of England’s financial policy committee said in 2021, after a review of the rules, that this other limit “is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.”

FFS. How is borrowing 4.5 times your income, especially if it 4.5 x joint income of a couple, not reckless? Back in the sensible days of Georgism Lite, that limit was about 2.5 x main earner's income.

Added to a decent deposit, that's enough to pay for the bricks and mortar value or the cost of building a new one (with a sane profit margin for the builder), which depresses the price paid for the land/location value, hooray. We know this is true because they were building plenty of new homes for FTB's during Georgism Lite (landlords were frozen out by rent controls, tenant protection and high taxation of unearned income), and the insurance value of housing was pretty close to how much they cost to buy.

Best Laugh of the Day - So Far

Of course if you didn't laugh you'd cry....

Bank of England staff demand big pay rise   (DT - paywall)

Well, considering that they print their own pay anyway, and always have done so, what are they bleating about?

Mickey and Taking does not cover it somehow.

"It's different this time."

Spotted by Lola. From This Is Money:

The Bank of England is considering easing mortgage rules in a move that could boost house prices.

The central bank, led by Governor Andrew Bailey, will announce next month whether lenders can increase the volume of large mortgages they dish out. Banks are limited in the home loans they can give to borrowers who need more than 4.5 times their salary. These customers must represent no more than 15 per cent of the new loans that banks issue.

The Bank of England referenced the rules in an update last month, saying 'there has been little evidence of a deterioration in lending standards or a material increase in the number of highly indebted households'.

a. This will all go horribly wrong again in 2025-26, just like it did in 2007-08. And in 1990 and 1973, although those busts weren't as bad as 2007-08 because back then we still had some Georgism Lite policies keep a bit of a lid on prices.

b. They appear to be perfectly aware that easing loan restrictions push up prices by the same amount, so actually it doesn't help anybody onto 'the ladder', they buy the same house but with more debts.

"Bank of England questions banks over negative rates"

From the BBC:

While the Bank of England may set its base rate below zero, it is unlikely most consumers will immediately enter the topsy-turvy world of being paid to borrow money. Those on fixed-rate mortgages will see no difference, while variable-rate mortgage terms often state that borrowers will never pay less than zero.

Savers with deep pockets such as the wealthy and the banks themselves, may be charged to deposit their money. Banks depositing cash overnight at the European Central Bank currently pay 0.5% to do so. In November, Swiss bank UBS began charging up to 0.75% for cash deposits from wealthy clients.

From the BoE:

Bank Rate determines the interest rate we pay to commercial banks that hold money with us. It influences the rates those banks charge people to borrow money or pay on their savings.

This is Emperor's New Clothes stuff. Read the bit in bold!

I know that commercial banks are required by regulations to deposit a certain amount of money with the BoE, so the BoE can pay any old interest rate it likes on that, even if that is negative i.e. the BoE can charge commercial banks for holding their money. That's just a cost of doing business or a modest payment towards the value of a banking licence.

I know that there are some loan agreements where the interest rate is expressed as the BoE base rate plus or minus a certain percentage, so the contractual rate might go negative (unless the loan agreement stipulates a minimum interest rate).

And I know that in extremis, if most banks were perceived as risky, then people would accept a (small) negative interest on their deposits with those banks perceived as safe (whereby NS&I is the central bank for mere mortals), just for the peace of mind.

But there's no underlying economic reason why it should happen. It's pushing a piece of string. If it were the other way round, and banks could borrow from the BoE for negative interest rates, they would have more money to lend on to borrowers and so they might well drop the interest rates they charge. But they aren't. They are just losing money on the token amounts that they have to deposit with the BoE. So you might as well argue, commercial banks will push up the rates they charge borrowers to try and make up the shortfall (or indeed reduce deposit rates to make up the shortfall). But they are already charging as much (or paying as little) as they can get away with.

Banks do not take deposits from customers with the sole purpose of depositing them with the BoE, that just wouldn't be worth the hassle. So it's not like commercial banks have to reduce the interest rates they pay to discourage people from depositing with them. If they can get away with it, they will do it, whatever the base rate is.

It would appear that some at the Bank of England aren't that stupid...

Subsequent to my recent post, Surely, the Bank of England is not that stupid? (the BoE said banks should increase mortgage-to-income multiples if house prices rose), comes this in The Telegraph (also emailed in by Lola):

Ultra-low borrowing costs have fuelled a huge property boom that pushed house prices beyond the reach of young buyers, the Bank of England has warned.

A five-fold surge in house prices over the past 50 years can be “more than accounted for by the substantial decline” in the cost of borrowing, according to research by the Bank.

Its economists warned that even a housebuilding spree would not have stopped a huge rise in prices caused by the long-term plunge in rates - undermining claims that Britain's property bubble has been caused by a lack of new homes.

I assume that they are referring to this Staff Research Paper, which goes into a lot of detail, but can be summarised as follows (exactly as we explain it):

a) Rent as proportion of average gross earnings is very stable, bobbing around at 35% - 40% for the past three decades (Figure 10). So it can't be 'lack of supply' otherwise rents would have increased faster.

b) Rent (a constant) divided by required monthly repayment rate (interest + principal) = mortgage.

c) Mortgage + deposit = house price.

The paper does not seem to make recommendations, although you'd have thought those are obvious...

Surely the Bank of England is not that stupid?

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.

"Houses are assets not goods: taking the theory to the UK data"

From Bank Underground:

In yesterday’s post* we argued that housing is an asset, whose value should be determined by the expected future value of rents, rather than a textbook demand and supply for physical dwellings. 

In this post we develop a simple asset-pricing model, and combine it with data for England and Wales. We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates.

Increasing scarcity of housing, evidenced by real rental prices and their expected growth, has played a negligible role at the national level.

Includes lots of lovely charts, tables and calculations.

As I have said many a time, all you need to know is
(1) local average wages in each area of the country, which tell you what local rents will be, and
(2) prevailing interest rates. You multiply local rents by the inverse of interest rates (or divide local rents by interest rates, same thing) and that tells you what house prices will be in each area to within a tolerable margin of error.

There is no need to factor in 'scarcity' to the equation, being impossible to measure once you have done the two-stage calculation.

This also explains why there is a larger variation in very local house prices within larger cities/conurbations. This is because there will also be a larger variation in wages in larger cities. Office cleaners earn the same everywhere, but the higher paid jobs are in the larger cities/conurbations, so there will be a wider range of wages in larger cities/conurbations, hence a higher range of rents and a higher range of house prices.

* "Yesterday's post" is also well worth a read, that also boils it down to the two-step calculation. They also include a section headed "Higher property taxes needn’t mean higher rents…".

Total Irony Fail

Classic piece of self regarding nonsense from Haldane at the Bank of England.  He is blaming 'groupthink' by the Great Unwashed driven by social media for future crises.

It does not occur to the tin eared numpty that he and his cronies are just as vulnerable to groupthink as are us poor plebs.  You only have to read the article and see his ongoing adhesion to punk Keynesian claptrap as believed by every other Central Banker to know that he is not capable of thinking outside his own box.

As for the notion that "...the Bank can learn from “folk wisdom” of ordinary people to help it understand the economy better.  is just a delusion.  In any event if us plebs know more about the economy than the Bank does as this remark implies, just why are they bothering?

Epic fail.

Mark Carney says time will never be right for interest rate rise.

From The BBC:

The time will never be right for an interest rate rise, Bank of England governor Mark Carney has confirmed in his Mansion House speech for the fourth year running...

Mr Carney said: "From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment [rate rises].

"You see, there's good inflation - house prices, and bad inflation - wage growth. We'd do what we can to stifle the latter, in the unlikely event it ever happens, but we are relaxed about good inflation.

"In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.

"The Brexit negotiations will drag on for a few years, so that gives me a breathing space for the remaining four years of my tenure at The Bank of England. Waiting to see what the long term impacts of Brexit are should tide over my successor for the next few years after that.

"If the worst comes to the worst, we'll admit that inflation is through the roof and savers are losing money, but at that stage our main concern will be young families who might be pushed into negative equity.

"Come on guys, you know how it works."

Following Mr Carney's comments, the pound fell about 0.4% against the dollar to trade at $0.6682.

And now it all makes sense...

A quote from this intriguing article in the Mail...

"The other major stumbling block for those landlords worst affected by the tax changes has been a perceived need to refinance, the costs of which can prove to be astronomical and may result in losing preferable mortgage terms agreed prior to the credit crunch."

I've long suspected that Mark Carney's 'forward guidance' (and all those bland speeches he manages to get reported everywhere as 'interest rates are about to rise') is all about wrong-footing consumers into fixing their mortgage rates.  It's forgivable too, as his job as a macro-prudential regulator is to keep the banks safe.

Mark Carney opens his mouth and the interest rates futures market jumps.  Mark Carney makes the merest hint of rising rates and folk in my office all start panicking and fixing their mortgages.  It works.

I guess not only do the BTL reforms create the need for highly leveraged landlords to re-mortgage, it also pushes them into business banking, where they can be well and truly pillaged with almost utter impunity.

I expected a "despite Brexit fears" bonanza but was disappointed

From the BBC:

Bank admits economy is looking better

In one sentence the Bank has revealed it is ready to upgrade its growth forecasts for the UK economy.

"The Committee now expects less of a slowing in UK GDP growth in the second half of 2016," it said, referring to the Monetary Policy Committee of Bank economists and external experts that sets UK interest rates.

The key point - the Bank's internal judgement is that growth in Q3 (that's July to September) will now be between 0.2% and 0.3%, a pretty chunky upgrade on its August forecast of 0.1%.

A most interesting headline from the BBC. Even they appear to realise that Project Fear was overcooked and are trying to distance themselves from it.

Andy Haldane Maybe the First Honest Bank of England Employee...

...for admitting that he has absolutely no clue as to what he is doing.

FWIW pensions are a dead simple concept. They are just deferred income.  What make them complicated is all the Kafkaesque rules written around them by the likes of Haldane and his cronies.

Dear God. What next! What next?

Update.

To save putting this in the comments thread.

The principle around the pensions tax relief is that you are deferring your pay.  You get tax relief on contributions and the fund grows free of CGT and CT/IT (Yes, MW I know I know  - but this is the principle).  But when you draw your benefits as an annuity you get taxed on the whole payment, not just the interest component as in a purchase life annuity.  This applies however you take the 'pension'.

The laws of compound interest and the expected return on a mixed fund of shares, bonds and property (the assets in a typical pension fund) mean that if you save between 12% and 15% per year of your gross income, you will, by about age 65 have accumulated a fund large enough to buy you a 'pension' which will be about 50% to 67% of your final wage.  This is just one of those 'laws' that works.

The problem is all the bloody rules around this simple concept.  They - the government and their bureaucrats - have, to put it in technical financial services language, so forgive me, fucked it all up. End of.

I have run a business in this area for nigh on 30 years now and I have seen these ratios work and I have witnessed the utter, utter failure of the likes of Haldane and his cronies to do anything sensible ever. Ever.

And just to make another key point we do our level best to keep charges low.  But when upwards of 70% of my revenue goes back out of the door in a combination of taxes and regulatory costs, we are not the cost problem.

Price Rigging

See here.

So, why aren't Carney and the rest of his crew and international mates also up before the beak?

Oh, so now they notice?

From the BBC:

The Serious Fraud Office (SFO) is investigating the way the Bank of England lent money to banks during the financial crisis, the Bank has said.

The Bank commissioned its own inquiry last year, then referred the matter to the SFO. Liquidity auctions enabled banks to access extra cash during the credit crunch that followed the collapse of Northern Rock...

As the financial crisis bit in 2007, the Bank launched a new type of liquidity auction - called long-term repo open market operations - whereby banks were allowed to put up a wider range of assets as collateral against the three-month loans. These assets included government bonds and mortgage-backed debt securities...


The exact focus of the SFO investigation is unknown, but BBC business editor Kamal Ahmed believes it may want to find out whether the banks exaggerated the value of such collateral to makes themselves look stronger, with or without the knowledge of Bank of England officials.

Surely we all knew this anyway?

The whole thing since 2007 has been a freebie for the banks and a blatant bank bail out at taxpayers' risk and expense. If the banks' assets had been worth what they told the Bank of England they were worth, then they wouldn't have been insolvent/illiquid and hence the bail out would not have been necessary in the first place.

The question answers itself: the Bank of England must have known that banks were overstating the value of their assets, end of discussion.

Fun Online Polls: Complete and utter chaos & The interest rate hike

The responses to last week's Fun Online Poll were as follows:

Complete and utter chaos (multiple selections allowed):

Iraq - 60 votes
Syria - 59 votes
Somalia - 59 votes
Afghanistan - 58 votes
Libya - 53 votes
Sudan - 51 votes
Pakistan - 46 votes
Palestinian territories - 44 votes
Nigeria - 42 votes
Egypt - 38 votes
Other, please specify - 13 votes

70 voters in total

So up on the podium we have those Islamic bastions Iraq, Syria and Somalia. Congrats and well done, lads!

Some people don't understand the concept of "Other, please specify", people suggested Tony Blair, Ukraine, Thailand, Kenya, Scotland, Zimbabwe and the UK, which makes seven. How are we supposed to guess what the other six were supposed to be?
-----------------------------------------------------------------
This week, nothing much new in the news, but there has been some burbling about vague possiblity the Bank of England vaguely possibly increasing the Bank of England base rate by a half a percent but more likely by a meaningless quarter of a percent or so sometime in the next, oooh, year or something, just to underline the government's anti-inflation credentials in the run-up to the next election, but Heaven forbid that anything happens to house prices.

So let's turn to the wisdom of crowds and see if we can collectively guess.

Vote here or use the widget in the sidebar.

"Bank of England rate rise panic: police hunt for man who dumped house price increase"

From The Evening Standard:

Police were today hunting for a man who abandoned an average monthly London house price increase in the middle of the street outside the Bank of England causing a massive interest rate rise panic.

Bank Underground station was closed and all roads around the area were sealed off while maco-prudential tools were deployed to defuse the threat of a rate hike.

Witnesses said the man left a dark green Toyota Avensis - believed to be worth approximately as much as the average monthly increase in value of a typical London home - abandoned in the road at the junction outside Bank station before walking away...

City of London police said the interest rate time bomb was made safe at around 1pm today, two hours after first arriving at the scene. Tougher affordability tests were used to check out the price increase before it was examined by officers in protective clothing.

A spokesman for the Bank of England said there had been talk of a bubble which proved unfounded but added that employees continued to remain vigilant.

Too big to fail?

Spotted here:

Some of the UK's largest regulators could face more onerous oversight requirements after citizens and market participants unveiled proposals to subject regulatory giants to greater scrutiny.

The regulators requiring the most immediate action, the Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO), and the aptly named Financial Catastrophe Authority (FCA) are now being required to  compile a list of their regulations, the implementation of which would cause, as they did before, another Lehman-style event.

Regulators and other unaccountable quangos with more than two employees (a man and a dog would count as two employees) would be considered 'systemically important financial institutions' (SIFIs), under the plans suggested by everyone in the country in a consultation paper published this week.

In the paper the it is pointed out that the FSB among other institutions, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity if they were to again cause failure in a disorderly manner.

For eaxmple the efforts of the FSB on SIFIs within the banking sector has already seen more onerous capital requirements levied upon such institutions via Basel III regulations (raising the prospect of more regulatory opportunity in requiring more stringent - and likely entirely pointless and counter productive requirements for asset managers), distorting market led capital requirements and leading banks to hold more potentially worthless assets like Sovereign Bonds.

The country has identified that the FSB must fall within the scope of the oversight: encompassing either regulators, quangos and central banks or all of them, collectively.

Those regulators and quangos reporting more directly to governemnt, like the Bank of England  would not escape assessment, since:-
"Printing money and buying up all sorts of debt, especially government debt, can have serious systemic consequences, even if its parent institution - government say -  was already assessed, as central bank balance sheets are usually not consolidated with the governmentts financial statements."

Mark Carney (pictured), chairman of the Bank of England, said: "Today's proposals are an essential first step towards addressing the risks to global financial stability and economic stability posed by the disorderly failure of financial institutions (other than banks and insurers) like the Financial Shambles Authority and the one of which I am in charge - the Bank of England. This is integral to solving the problem of financial regulators and quangos that even though they can fail, are never seen to suffer the consequences - this is about making all regulators and quangos fully accountable to the public that pay for them and the fat salaries of people like me."

"Bank of England must guarantee a permanent house price boom, says Rics"

From the BBC:

The Bank of England should use its powers to generate house price increases of at least 5% a year - more than double the normal inflation target and nearly double annual earnings growth - to "keep the froth in" price booms, a surveyors' group says.

The Royal Institution of Chartered Surveyors (Rics) said that a less than 5% annual rise should trigger an increases in caps on how much people could borrow relative to their incomes and a corresponding reduction in deposits required.

It is not suggesting that sellers should face a minimum price they can demand when selling their homes.

The Bank said it was being vigilant and pointed out that their new Governor's record in stoking the Canadian house price boom spoke for itself.

Unearned gains in the UK housing market have picked up in recent months after a few years of flat lining during the financial crisis.

There has been considerable debate during the week about the future of the UK housing market and the limited potential for government schemes such as Help To Sell to create artificial price bubbles.

Mark Carnage

"Key risks to the UK financial system"

From page 2 of the Bank of England's Systemic Risk Survey 2013 H1:

There are three new entrants to the top seven risks: the risk of property price falls (cited by 25% of respondents, up 11 percentage points), operational risk (up 10 percentage points to 24%), where 'cyber' security was most frequently mentioned, and risks surrounding the low interest rate environment (the fastest growing risk, up 16 percentage points to 24%).

Participants' perceptions of an increased risk of property price falls (in particular residential property price falls) could be consistent with views of prices becoming overinflated or about to become overinflated. Responses in the low interest rate category focused on the risk that artificially low interest rates are creating distortions in asset allocation, potentially leading to overinflated risky asset prices.

The complete and utter po-faced state of denial here is staggering.

It is the self same Bank of England which is pushing down interest rates with the sole aim of driving up asset prices (as distinct from their values), which for the man in the street means land prices i.e. a house price bubble.

Some older savers are rightfully unhappy with miserably low interest rates and annuity rates, but happily, the Bank of England has blinded or bribed a larger majority with the Fool's Gold of a house price bubble. And if ever their lovely bubble looks in danger of popping, well, there's only one thing for it isn't there? Reduce interest rates even further in the vague hope that they can fob off the priced out generation by telling them at least interest rates are low and there's always the Help To Sell scheme to help them onto the ladder etc.

Under Wadsworth's Square Law of Nequity, it is overall far, far cheaper to allow house prices to fall and to write down individual loans to the new lower value of the homes on which they are secured (so that nobody is stuck in nequity for years) than it is to try and keep a house price bubble inflated. The former is a knowable and affordable sum of money and this solves the problem. The latter is a huge and unknowable sum of money that merely results in larger costs in future.

But for some reason, they can't and won't contemplate that.