The Bank of England is now re-writing history about UK house prices

Yesterday saw the latest in a series of interviews on the Iain Dale show on LBC Radio by Ian McCafferty of the Bank of England. Actually it was the last by Ian as he is about to depart the Bank of England. Before I start I should point out that we were colleagues back in my time at Baring Securities which feels like a lifetime ago mostly because it is! His main claim to fame was declaring that the German Bundesbank would not do something at a meeting and then the door was opened by someone keen to tell the room some news which I am sure you have already guessed.

Moving forwards in time to yesterday Ian had more than a little trouble with the concept of full employment as he assured listeners that the UK was at full employment at the moment. This was really rather breathtaking as it showed a lack of understanding on two major levels. Firstly if we just stay with the unemployment rate those who read my update yesterday will be aware that Japan has seen an unemployment rate some 2% lower or nearly half ours. An odd thing to miss as our shared history involved specialising in Japanese economics and finance. Also it was a statement that on the face of it made no nod at all to the concept of underemployment where people have some work but not as much as they would like. So in his world both Japan and underemployment seemed not to exist.

Presumably Mr.McCafferty was trying to bolster the case for last week’s interest-rate rise in the UK which of course needs all the bolstering it can get but he ended up being challenged by the host Iain Dale. The response was a shift to claiming we are around the natural or equilibrium rate of unemployment but of course this led to another problem. On this road he ended up pointing out that the Bank of England has had more than a few of these but he did at least avoid a full confession that they started the game by signalling that a 7% unemployment rate was significant but now tell us that the equilibrium rate is 4.25%. Thus the reality is that they have chased the actual unemployment rate like a dog chases it tail although to be fair to dogs they usually tire of the game once the fun stops. Whereas should we live up to the song “Turning Japanese” the Bank of England will have chased the “equilibrium rate of unemployment” from if we are generous 6.5% to 2.5%.

House Prices

As you can imagine this subject came up and it was interesting to hear an explanation of UK house price rises omitting the role of the Bank of England. You might have thought that having gone to the effort of producing the bank subsidy called the Funding for Lending Scheme in the summer of 2012 and then produced research saying it had reduced mortgage rates by up to 2% that you might think it was a factor. This would be reinforced by the fact that it was in 2013 that house prices in the UK began to turn and head higher. There is also the Term Funding Scheme which began in August 2016 which amounted to some £127 billion of cheap liquidity ( 0.25% back then) for the banks which even the casual observer might think was associated with the record low mortgage interest-rates which were then seen.

This seems to be a new phase where the Bank of England sings along with Shaggy “It wasn’t me.” The absent-minded professor Ben Broadbent was on the case on the 23rd of July.

But it should be borne in mind when reading – as one often does – that QE has done little except boosted
prices of assets like shares and houses, or even led to a “boom” or “bubble” in those markets.

The research quoted was from colleagues of his who have voted for this QE and I am sure many of you would love to be judge and jury on your own actions! Later he tells us this about UK house prices.

But the latest figure is barely any higher than it was in the middle of the last decade.

So it is the same as the level that contributed to the crash? Not quite so good and whilst it may not be that much of an issue when your salary plus pension benefits total £356,000 many will note that real wages are 6% below their peak according to the official data.So house prices compared to wages are rather different.

Also there is this issue.

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity
and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor,
according to the most detailed analysis available, did easier monetary policy have any net impact on it.

I guess he has never seen that bit in the film The Matrix where the Frenchman describes the role of cause and effect. Also on the subject of inequality I note that FT Alphaville has pointed out this.

In London and the South-East of England, this shift has been profound – real prices are nearly 30 per cent higher in London, and 10 per cent higher in the South-East and East.

Some house owners are indeed more equal than others it would appear. But this brings us back to Ian McCafferty who assured us on LBC that the ratio of house prices in London to the rest of the country “is now re-establishing itself at close to its more normal long-term level” . Is 30% higher the new “close to”?

Inevitably the issue of Brexit came up and sadly our intrepid policymaker seemed to struggle with both numbers and words in this regard. Here is the Reuters view on this.

“We are getting stories on (how) the numbers of French and German and other European bankers that are coming to London have fallen quite sharply over the last couple of years,” McCafferty said in a question-and-answer session on LBC radio.

You might think that he would know the numbers via contacting the banks rather than listening to “stories”. Also he had opened by saying there had been an “exodus” of such bankers which of course evokes the thought “movement of jah people” a la Bob Marley. The response from the host was that the number of bankers in the City had risen which then got the reply that the inflow had slowed which again is somewhat different to the initial claim. As this is an issue that is both polarised and political an independent ( his words not mine) should be ultra careful in this area rather than giving us vague rhetoric which falls apart at any challenge.

Oh and before we move on from housing there was this bit.

a number of those who are renting particularly those who work in the City.

Was he thinking of Governor Carney who of course got a £250,000 annual rent allowance?


There is much that is familiar here as we note that the Bank of England is looking to re-write history in its favour. There are two initial problems with this and the first is the moral hazard in you and your colleagues judging your own actions. On this road Napoleon could have written a counterfactual account of how his retreat from Moscow was a masterly example of the genre. Also there are clear contradictions in the story of which two are clear. The rise in asset prices seems able to boost the economy on the one hand but to have had no impact on inequality on the other. London house prices can have soared and become completely unaffordable in central London to all but the wealthiest and yet are close to normal long-term trends.

Only last week we were guided towards three interest-rate rises but now there seems only to be two.

Britain is “now at full employment” and so can expect “a couple more small interest rate rises” in the next two to three years to stop the economy from overheating, according to Bank of England policymaker Ian McCafferty. ( Daily Telegraph which failed to spot the full employment issue)

Maybe it is because they are only raising them so they can later cut them.

Higher interest rates will also give the Bank room to cut them once more if the economy hits a troubled spell in the years ahead.



34 thoughts on “The Bank of England is now re-writing history about UK house prices

  1. I think that you have to look at it from their point of view. Let me translate:
    1. Full employment means that they and all their friends have agreeably well paid jobs. The fact that a few uneducated non-London resident working class people cannot find work is of little concern
    2. London is perfectly affordable if you (as most of these people at the BoE did) did one of three things:
    A) Bought thirty years ago;
    B) Inherited a ton of money; or
    C) Have a £250,000 a year rental allowance
    Or a combination of the above.
    The only relevance, of course, of house prices outside London is whether or not you are trying to buy your second house in, say, Salcombe or Rock and whether the prices for sea-facing houses is going up.

    I recall distinctly when I went to the City and tried to get my first mortgage. The broker who dealt with city folk then said he’d find me a mortgage of up to 85% of value up to 6X my salary. I asked him how I was to fund the deposit of 15% and (I quote) he said “Sell some shares”. Ever since then, I have regarded the whole city as utterly out of touch with the real world…

    • Hi James

      Those were very different times as for example banks and brokers offered mortgage subsidies down to a 4% interest-rate if I remember rightly for up to 4 times your money capped at £100,000. Back then though £100,000 was a tidy sum in the housing market. Mind you as my first salary out of university was £7500 a year it was quite a distance away!

      Just to give younger readers an idea of different times M&S paid graduates more than that and so I think did Lloyds Bank. I suspect the idea of being subsidised down to 4% in terms of interest-rates gives another clue about different times as well.

      • I remember receiving a subsidised mortgage from my employer first £40k at 5% (which in the eighties was a bargain) could buy a flat for that in SE London too

  2. Hi Shaun
    With these overpaid callous buffoons running our
    financial system I have a question.
    As a nation, compared to 2008, are we closer to
    meritocracy or feudalism?


    • I read recently the number of landlords is up to 2.5 million from 2.25 million in the few years since Osborne announced a hike in SDLT for 2nd home buyers. Shows what a pathetic attempt it was to get more owner occupiers.

      But with MIRAS for landlords who are basic rate taxpayers, and IO mortgages it really is of no surprise.

    • we live in a Bank-o-cracy or if you like , feudal financism

      All hail our banking over lords ( or is that lards ??)


    • Hi Jason

      Yes I had spotted that and it raised a wry smile as whilst that was true in theory I doubt that it is in practice. A while ago I looked into how the sex & drugs elements of GDP were measured and it looked rather shambolic. For example the drugs analysis was based on a survey done over 10 years ago. Of course there are obvious difficulties in counting things which are illegal which is why it was not the best idea to include them

      So ironically they are probably both right and wrong….

  3. Why oh why are 2007 house prices which caused the UK banking system to implode seen as the benchmark.

    Why does this never get called out, its as if pricing most the population out of owning a house is the standard now.

    I do look forward to more populists be they Trump, Corbyn or these Italians now in charge as these people are the start of fixing the corrupt system.

    • Hi Arthur

      We see this so often I am afraid. The establishment must spend so much time on what are called “chart crimes” and finding as high a benchmark as possible so that their arguments seem reasonable. What is sad is that they do not get called out more often or in some cases at all. It is unfair on the ordinary person to expect them to do this but financial journalists and the like should be wise to it. Sadly much of the analysis world is copy and paste.

      Thus such thoughts get mostly unchallenged into general circulation and the whole cycle begins again.

  4. Hi Shaun, I enjoyed your rollercoaster call-out of the BoE officials on that range of counts. I wlthinm we know that the whole of Governing classes in the country are beginning to sense the chickens coming home to roost…. and they are squirming, as you say.. tell her it wasn’t you!

    I saw a revealing article in the FT last night regarding capital flight. It started off reasonable enough explaining how banks were creating effective (not letter box) entities in Europe ( Frankfurt & Paris) because of something called Brexit (whatever that is). Anyway, apparently to be an effective bank in Europe you have to have your reserves in Europe… so the article title makes sense, there is capital flight from the UK to Europe.

    Now if I was running banks in the UK or responsible for the wellness of the City I would consider the loss of money to be managed as a prime failing, I would be nervous.

    If you then read the comments section quite a few folk seem to think other capital might go as well… if that happens then we might find the BoE is forced to attract money into the UK to make up for the empty ledgers. The price of money might need to be upped sustantially and without consideration for secondary effects… gulp.

    • “….allegations it knowingly misrepresented the quality of the residential loans..”

      yer don’t say !

      good job our Banks will not get caught out like this – after all they own the Government…..


    • Carney and the BoE were deemed as heroes by the 48% for printing money and dropping interest rates after the referendum. Safe pair of hands and all that.

      People now just expect bankers to carry on screwing the masses up as the LIBLABCON or DEMREP party actively encourage it, thus it is mainstream politicians who are held in much lower regard.

  5. Of course nothing is ever their fault is it? Their standard response to criticism in general or the state of the economy is “just imagine how bad it would be if we hadn’t intervened”

    • Hi Kevin

      It is a nice job in a way isn’t it as you can never fail. It is the polar opposite of being a manager of Chelsea football club where you can never win! But the truth is that if you cannot fail then you are unlikely to succeed. Some of that is human nature but the other part is that to learn and grow you have to be willing to admit some mistakes.

  6. Great blog as usual, Shaun.
    Found the McCafferty interview on Twitter. This was a teachable moment about how the increase in bank rate affects consumer price inflation but he didn’t really take advantage of it. He said that some measures of inflation included mortgage interest rates that were pushed up by the bank rate increase and others weren’t, which was a little vague. He might have said that the RPI, designed as a cost-of-living index, included mortgage interest payments. The UK CPI, because it was designed as a macroeconomic index, didn’t. It wasn’t considered appropriate that the Bank of England’s inflation measure should be sensitive to mortgage interest cost increases due to a bank rate hike made to reduce the inflation rate. He implied that the August increase in the bank rate wouldn’t have any impact on the RPI inflation rate after 12 months, but of course it isn’t that simple, since for fixed-rate mortgage-holders the impact of the higher bank rate would only click in when they renewed their mortgages. There would also be secondary effects from rail fares and vehicle excise duty being uprated based on the RPI. The CPI would also be subject to these secondary impacts. Vehicle excise duty was excluded from the CPI until February 2012. I never understood why it was included, since HICP guidelines specify that: “special fees and taxes paid to government for licenses will be excluded (when there is no equivalent good or service received in return).”

    • “…since HICP guidelines specify that: “special fees and taxes paid to government for licenses will be excluded (when there is no equivalent good or service received in return).”

      Ah that’s why QE and saving the Banks didn’t affect inflation – all under the umbrella of “special fees ” !!


      • I think it’s a sensible exclusion. Council tax is excluded on that basis as well. If the government is taking money out of the private sector through taxes or licences that are taxes under any other name, that’s deflationary, not inflationary, so they should be excluded from a macroeconomic inflation measure. On the other hand they do increase the cost of living, which is why council tax is part of the RPI/RPIJ. The two kinds of indices should have different exclusions. The CPIH is the index that tries to be all things to all people. It is mostly just the CPI, so a macroeconomic index, but then it includes council tax because that’s what a good cost-of-living index would do. It’s like an athlete training for the marathon and the shotput.

  7. It was quite a car crash, ended most amusingly by Gammon man demanding to know when the BoE would be “getting behind Brexit”, (which illustrates just how the average Brexiteer is ignorant of economics and finance).

    As i have said before, the key problem is that none of these BoE MPC people can admit that they have been following the wrong policy, since it would trash their own reputations and those of their predecessors back to when they were made “independent”. They therefore have to seek to justify making the same errors as Lawson and (in the US) Greenspan. in running a low rate policy and pumping up asset prices before the inevitable crash. The daftest line now being trotted out is that rates have risen to give the BoE some room for manoeuvre in the (inevitable) event of a downturn. We are so far below the liquidity trap level now that a cut from 0.75% to 0.5% would merely maintain house prices.

    In fact, whatever cunning plan Carney and little helpers have now to cut rates asap, it must be far more likely that they will be forced to raise rates again soon to stop the run on the GBP as Brexit becomes a total car crash and the political impasse. the deal has to be done by October for ratification by March, but the outstanding matters seem irresolvable, making a hard Brexit very likely. Fears of this have already tanked the GBP – down from USD 1.40 since April (it was e1.40 when I was in Austria in late 2015!) and is struggling to hold e1.12 (remember the CBI saying e1.30 was a competitive rate for entry?). This will suck in inflation and with rising raw materials prices (in USD mostly), even the CPI will start to become realistic (anyone else notice that McCafferty told one caller that anyone with an RPI-linked pension had done rather well in the last 11 years? … like himself). This amid the political uncertainty will threaten a run on the GBP and Carney will have to raise rates.

    This also will affect the housing market – no surprise that the BoE denies all responsibility for prices, but a rate rise will knock prices. However, much as the CISI mag also wanted to avoid my comment about hot Russian money maintaining London prices, that hot money will be looking for another home if the GBP tanks just as rates start to rise. Thus the imperative for the BoE has to be Shaggy’s approach when it comes to house prices, which ever way they go.

    • Had to down vote for you comment about Brexit voters being ignorant of finance and economics. What proof do you have that remainers are more enlightened on this subject?

      As after mocking leave voters you then put the blame firmly on the remainer establishment for the economic disaster that started in 2007 and has yet to come to a head.

      But then you are blaming Brexit for a potential run on the pound speaks.

      Brexit most certainly will not be at fault for any future run on the pound, unless of course Brexit was at fault for what happened prior to the 2008 so called financial crash, QE, ZIRP, govt. borrowing and spending like there is no tomorrow etc etc…

      • Surveys quite clearly show that we were voted out by the elderly and less well-educated, the latter including many public sector workers, who think money grows on trees. However, the last caller to LBC is a good illustration – what does he expect the BoE to say, give the economic data. As for your last paragraph, you make my point – the GBP has fallen from e1.40 in Dec 15 to e1.12 and what issue has dominated the scene in that period? That plus the issues surrounding trade on a hard Brexit (have a listen to this re already causing the run on the GBP – unless you think there is some Remain conspiracy?

        As for criticising the Establishment – yes, i will criticise what I think is wrong – and I have been proved right on many occasions. I don’t change my view for political reasons – I criticised Lawson for his Establishment idiocy in 1988 and I do not for his Leaver idiocy.

        Neither he nor any other Leaver has yet to produce a coherent economic argument, hence the attempts to blame anyone else.

        • We are bombarded with the cost of leaving the EU but no one ever discusses the likely cost of staying. Using the cost per family that the press like to use gives us the following food for thought:

          Number of families in the UK – 19.0mil ( office for national statistics), Net contribution to EU 9.0 billion pounds ( governments best estimate – which is worrying if they don’t know!) which means each family pays £473 to the EU. The EU would dearly like to get rid of the rebate and in the event of us staying it is highly likely it would go. At £5.6 billion this would add another £294 to each families bill so we are now at £767. The EU desperately wants to increase it’s budget, create an EU army etc etc so this is only going to increase and probably by quite a lot so we could soon be looking at the thick end of a £1000 per family. Not guaranteed I know but just as scientific as the scare stories in the press. It is something that needs to be balanced against the cost of leaving that gets tossed around.

          • Just think how much cheaper it would be at e1.30. That £80 a month = about 0.75% on interest rates, which may be necessary to stabilise the GBP. Then there is all that GDP we have lost = already the bus money, then add in all the costs of friction on trade. It is not as simple as the Daily Express likes to think.

        • Were those the same surveys that said remain were going to win?

          You really do come out with some utter nonsense. 2 nurses 1 aged 61 learnt on the job, one aged 21 was forced to get a degree to do the same job … So despite the older nurses 40 years on the job and life experience tossers like you are claiming the young one is more educated.

          Fact you even brought brexit into shows you’re just some obsessed libtard who isn’t mature enough to accept you lost.

          And the pound Carney has printed much more money and done nothing but talk the currency down, he is implying interest rates … maybe if he had done the opposite and kept out of politics it would be at 1.4.

          But the pound bought 2.1 USD and 1.5 Euro in 2007 before the financial crash is that Brexits fault? the pound was falling significantly in the years prior the referendum even being announced..

    • Dave, I disagree that Carney would raise rates to defend sterling, in fact as he is working for those who are trying to prevent BREXIT the run on the pound will be used as leverage to force us to rejoin.

      • That might be his plan, but to quote MacMillan “events, dear boy, events” – it would be a case of forcing it.

  8. I am sure regulars to Shaun’s blog will say “nice of you to catch up”, but there is an interesting piece in the Ft today entitled “Not a credit crunch yet, but the ground is shifting”. It notes the rise in borrowing costs, trade wars etc. are causing to the black clouds to gather.

    • Hi David

      Let me get ahead of them in another respect. When we next hit trouble it will be nobody in authorities fault and could not have been predicted ( even though it was)and if anybody is at fault it will be those damned financial terrorists……

  9. Forward Guidance NZ style.

    Adrian Orr (NZ Reserve Bank Govnr.) said, after announcing that the official cash rate will stay at 1.75%
    “We will do what central banks do best, which is watch, worry and wait.”

    and inflation ? – “will increase towards 2%”
    the output gap ? – “would be softer for longer”

    So growth is the worry? Yep –
    “the slightly slower growth in the economy had brought about a change in the bank’s thinking”

    and the change was? – they think the cash rate would stay at 1.75% for longer than previously thought.

    How much longer? A year.

  10. If we’re at full employment, why is the government sanctioning one in five jsa claimants at any time?

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