Mark Carney's housing pill needs time to let economy digest it

http://www.theguardian.com/business/2014/jun/26/mark-carney-housing-economy-lending-bank-england

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Mark Carney's been taking lessons from his chum Mario Draghi. The president of the European Central Bank has become a dab hand at getting what he wants just by talking tough. Carney is trying to turn the same trick with Britain's housing market.

The governor of the Bank of England certainly cranked up the rhetoric on Thursday as he presented Threadneedle Street's financial stability report. The Bank was concerned about the high level of personal debt. It was aware how quickly responsible lending could become reckless. It was an alert to the major risks that the bursting of a property bubble posed to the UK economy.

But apart from Carney's language, there wasn't much in the way of direct action to cool down the housing market. The Bank's new affordability test says mortgage lenders should assess whether borrowers could still keep up their monthly payments if mortgage rates were to be three percentage points higher than when they took out the home loan. But as the Bank acknowledges, most lenders are already using a 2.5 to three percentage-point stress test to assess the financial vulnerability of customers.

Nor will the second measure have any immediate impact. This is the stipulation that no more than 15% of the new mortgages granted by lenders should be at or greater than 4.5% of a borrower's income. At present, only around 10% of loans fall into this category, while some lenders have already voluntarily imposed a lower loan to income cap of four times a borrower's income.

After all the speculation in the run-up to the release of the FSR, the Bank is now open to the accusation that it has bottled it. Given Britain's long and inglorious history of property bubbles going pop, it may live to regret not doing more now to prevent house-price inflation accelerating from its current level of 9% (as measured by an average of the Halifax and Nationwide monthly surveys).

There are, though, three reasons for giving the Bank the benefit of the doubt.

The first is that rhetoric can have an impact. Draghi showed that clearly with his pledge to do "whatever it takes" to save the euro. Closer to home Carney's predecessor, Lord King, managed to slow down the UK's last house price boom – if only temporarily – with a single speech in the mid-2000s. The new governor has made it clear that he is watching lenders closely and they will be expected to respond to the raising of the gubernatorial eyebrows.

Secondly, the measures announced on Thursday will eventually bite if developments in the housing market unfold in the way that the Bank expects. The share of new mortgages at loan to income ratios of 4.5 and above is forecast to hit 15% within the next 12 months, and sooner if house prices grow more rapidly than Threadneedle Street is predicting. Carney and his FPC colleagues don't think the property market is booming out of control but have taken out an insurance policy in case it does.

Finally, the Bank has a number of other tools it can use and Carney listed them today. It could make the stress tests tighter; it could make loan to income caps tougher; it could introduce loan to value curbs; it could force banks and building societies to hold more capital against mortgage lending. Ultimately, of course, the Bank's monetary policy can step in with higher interest rates if the FPC proves not to be up to the job.

The Bank's strategy is a tentative one, taking things in a "graduated and proportionate" manner, as Carney puts it. This is not especially exciting, but there are times to be tentative rather than aggressive. And this is one of them.