Could the UK target house price inflation and should we?

Yesterday brought news of a policy initiative from the Labour party on a subject close to my heart and was a subject which occupied much of my afternoon and evening. It also reminded me of the way that social media can have more than a few different but similar strands ongoing at the same time. So if I missed anyone out apologies but I did my best and did better at least that the respondent who seemed to think my name was Tom.

Here from The Guardian is the basis of the proposal.

The Bank of England could be set a target for house price inflation under plans being explored by the Labour party, with tougher powers to restrict mortgage lending to close the gap between property prices and average incomes.

The shadow housing secretary, John Healey, is considering whether, under a Labour government, the Bank should be set an explicit target following a decade of runaway growth in the property market, with the aim of tackling the housing crisis.

The author of the idea is Grace Blakeley and I replied to her that there are various problems with this but let us set out her idea properly from her paper for the think tank the IPPR.

This would be equivalent to the remit the Monetary Policy
Committee has to control consumer price inflation. Under such a target the Bank of England should aim to keep nominal house price inflation at (say) zero per cent for an initial period – perhaps five years – to reset expectations,
and allow affordability to improve.

As I replied to Grace I am a fan of that in spirit but there are issues including one from the next sentence which I have just spotted.

It should then be increased to the same
rate as the consumer price inflation target of 2 per cent per year, meaning zero real-terms house price growth.

Er no that is not zero in real terms because if you are aiming for “affordability to improve” your objective must be for wage growth to exceed house price growth yet it does not apparently merit a mention there. If for example both consumer and house price inflation were on this target at 2% per annum you would be losing ground if wage growth was below that level.

How would this be enacted?

The target should be implemented using
macroprudential tools such as capital requirements, loan-to-value, and debt to-income ratios.

The first question is whether you could do this? Mostly a new policy regime could as we already have some moves in this direction from the Bank of England as pointed out in the paper.

The FPC recently implemented a
loan-to-income ratio of 4.5 per cent for 15 per cent of new mortgages,

The two catches as that this area is one where the truth can be and sometimes is hidden as those who recall the  “liar loans” era will know. Next is the concept of shadow banking or if I may be permitted a long word the concept of disintermediation where you restrict the banks so people borrow form elsewhere such as offshore or overseas.

These problems would be especially evident if you tried to implement this.

Since house price inflation is different in parts of the country, the FPC’s guidance should be regionally specific.

That recognition is welcome but the scale of the issue troubles me. Let me give you some examples from right now where house prices are rising in much of the Midlands and Yorkshire as well as Northern Ireland whilst falling in and around London. Also as @HenryPryor pointed what the situation in Northern Ireland is very different to elsewhere.

Confirmation from that despite enjoying robust inflation in recent months, house prices in Northern Ireland remain some 41% 𝐥𝐨𝐰𝐞𝐫 than they were just prior to the start of the financial crisis in 2007.

Perhaps you could define Northern Ireland but is even it homogenous? A clear danger is that you end up with a bureaucratic nightmare with loads of different definitions and all sorts of border issues as well as increasing the likelihood of another form of disintermediation.

The relationship between the Bank of England and the government

A clear issue is that whilst the Bank of England can influence house prices it does not control them and the paper sets out areas where it is not in control.

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.

The supply of housing is something we have discussed on here pretty much since I began writing articles and the theme has been that government’s of many hues have serially disappointed. The Ebbsfleet saga has been the headline in this respect. Also I have to say that the idea of the Financial Planning Committee needing to “request” help from government policy is welcome in one way but problematic in another. First it is a confession that macroprudential policies are far from a holy grail in this area. Second I can see many scenarios of which the main one would be an upcoming election when the government would simply pay lip service or worse ignore the “request”. Thus we would likely find ourselves singing along to Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

I do mostly agree with this part though and so does the Bank of England as otherwise it would not have introduced the Funding for Lending Scheme back in the summer of 2012.

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).

Comment

There is a lot to consider here and let me again say that as regular readers will be aware I think that economic policy does need to take account of asset price booms and busts. The catch is in the latter part though because the very same Bank of England that you would be asking to reduce house price growth has been explicitly ramping it since the summer of 2012 and implicitly before then with the Bank Rate cuts and QE bond purchases that preceded it. So the current poachers would have to turn into gamekeepers. Would they? I have my doubts because as we look around the world central banks seem to fold like deck chairs when asset prices fall.

Next comes the issue of could this be done? To which the answer is definitely maybe as you could start on this road and at first your theories would apply. But if we look back to the past history of macroprudential policies there was a reason why they were abandoned and it is because they themselves lead to a boom and bust cycle and bringing things up to date I have doubts on these lines as well as I tweeted to Grace.

One of the problems of central banks in the modern era is that they have often ended up operating in a pro-cyclical fashion. How can you be sure with their poor Forward Guidance record that they can be counter cyclical?

It is easy to spot cycles in hindsight but looking ahead it is far harder as otherwise the aphorism that central banks have never predicted a recession would not keep doing the rounds.

Can we fix it? Yes we can make a start as I hinted at here.

Whilst I support the spirit of this in terms of including house prices. I would point out that the UK could change things by simply going back to the Retail Prices Index as an inflation target because it includes house prices.

Personally I would update the RPI ( using the RPIX version to exclude mortgage costs) so that it explicitly has house prices rather than reply on them implicitly via depreciation and as a stop-gap we could drop out fashion clothing to trim the formula effect. So in effect we would be reversing the changes made by Gordon Brown in the early part of the 2000s. Then off we go although something else would have to be changed as well as basically a clear out of current Bank of England policy makers.

you have the issue of it these days also supporting the economy as defined by GDP

Me on The Investing Channel

30 thoughts on “Could the UK target house price inflation and should we?

  1. Hi Tom… Whoops sorry Shaun.

    I was following the Twitter exchange last night as a distraction from my interminable Brexit spats and I think someone mixed you up with Tom Forth. To the matter in hand as much as I favour the state playing a role these national Grand Designs have a habit of going badly awry. There is no reason to think that wouldn’t be the case this time.

    The answer has always been build more council houses rented out on a lifetime mortgage to incentivise tenants to ownership. There is no market at the bottom of the property chain only the state can perform this role. The private sector ‘solution’ is basically building cattle pens for humans.

    • Id sooner planning laws were changed as to make development land available at not much more than the price of farmland so people could build themselves and keep the government out of it, as all theyll do with more council houses is bribe future voters by giving them away on the cheap … and so it’ll continue.

      • depends on how you regulate – I can buy cheap land , build a shack , then sell it onto a large builder for massive profits !

        because then its brownfield land 😉

        Forbin

        PS: yes it will never be allowed – only the big banks and construction companies are allowed that type of “development” …

      • That could be a part of the solution and much as I understand your reluctance to involve the state there is simply no option in this case. Where no market solution exists the state must act.

        • That is a market solution, as free a market solution as there can be.

          But imho there is no housing shortage, in the sense that more people than ever own 2 or more, a strange kind of shortage.

          Ending Buytolet mortgages and bringing in Section 24 for all taxpayers would be my short term fix, quite simply we need a deep sharp crash in house prices/ Dragging a correction out for 5/10 years is absurd, as thats what was suggested 10 years ago.

          • it will not be allowed to happen as the TBTF Banks are needful of high asset prices to offset their collective losses .

            the Banks must be saved at all cost ! ( including me , you and anyone/anything else !!)

            forbin

          • You’ve only solved a part of the problem and why on earth shouldn’t people own two homes? Without state intervention at the bottom of the ladder, where the market cannot function, there is no solution. Bear in mind first class public transport is also required. Buy to lets will die of their own accord when social housing is invested in properly.

  2. Dear Shaun (or Tom if you prefer!!) No surprise the labour party go for an heavy duty and bureaucratic set of controls. Lots of juicy jobs for the statali.
    We increased our population by 10 millions in ten years. We have nett inwards migration running into hundreds of thousands each year. Its not rocket science. Straight forward economics 101. Increase demand and prices go up.
    Central London is a moneybox for the savings of every illicit source in the world. The rest of the country is dealing wth massive, largely uncontrolled immigration. There is also a massive oversupply g global savings. An issue which you seem to wilfully ignore. These factors, combined, will result in (the medium turn) to further increases in house prices.
    Of course there are limits but we are nowhere close to reaching them. Global savings seem set to increase and this will further depress interest rates. More negative rates -here we come! This will make mortgages even cheaper and up will go house prices. Buy property; the only guaranteed game in town.
    When (which is never) our political parties stop immigration and start taxing savers then sell your properties.
    Regards Charles

    • ah i guess though the only growth we can get with the current system is more people.

      maybe we should fully embrace one of the two plans I have proposed before

      they are

      1, Our problems appear to be one of lack of planning . therefore we need to plan ahead if population growth is the desired out come and this appears to be the case for all the main parties in Westminster.

      Given that fact we can use the London population density to work out the SE England ( from the Norfolk Broads to Land’s end ) carry capacity . And that is 500 million people approx. Of course we’ll have to use all those brown field sites like golf courses and AONB ( you need to sacrifice something ! ) and build housing to match , with all the amenities they will need ( schools, water , etc ) .

      We may well achieve the GDP of India !

      speaking of which……

      2, Adopt the entire sub continent of India as British , that is we’ll still be Great Britain but all our new found citizens will be Greater Great Britain subjects – what’s not to like ? all the labor you possibly need or use !

      and GDP will be brilliant too! ( GNP may be a little low but sacrifices are needed folks ! GDP rules ! )

      For both plans we are planning ahead for population growth so why not ?

      Better than no planning like we have now ….

      Forbin

  3. Rather than a macro-economic policy, it would be far simpler and faster for councils / other authorities to CPO empty or underused housing that has already been built. The mechanisms for this already exist, if woefully underused, and this would drive prices down. As has been shown by Ian Muhearn, there is in fact a surplus of living space in London and elsewhere in the UK, even if this at the moment is largely unaffordable for those who need it. As we are experiencing it now, the drive to build more social or affordable housing is coming at the detriment of working class communities and open space in areas where there is already high density.

    • Hi BarbJ and welcome to my corner of the web

      I am nervous about Compulsory Purchase Orders but I agree that we could do much better. I think we need to find out why so much housing is empty or underused. In my locale in Battersea then much of it is foreign buyers who drift in and out but that is far from true everywhere. Also my crane count from the Dogs and Cats home to Vauxhall is now 49 but the catch is illustrated by one development which caught my eye,. Nine Elms Park

      “Working with award winning architects Allies & Morrison, the site has secured planning permission for a development comprising up to 1,950 residential units over 7 development plots and a total Gross External Area (GEA) of circa 2.4m sq. ft. (c.219,000 sq.m).”

      I hope there will be a park there is little sign of it right now. But the development in Nine Elms is on a grand scale especially as it is plainly for (mostly) foreign buyers.

      Younger friends of mine are just frozen out 😦

      • CPOs were used to good effect in central London in the 1970s, and I would claim that these + squatters saved many Georgian and Victorian buildings in Zones 1 & 2 which would otherwise have either decayed past the state of repair or would have been bulldozed for the then office building boom. Blakeley and Collins probably don’t know much about this since it was before their time and there’s been almost nothing written about it.

        I live on a council estate where BTL landlords are charging 4-5 times what the council does, so that many of these flats are severely overcrowded with students or service workers, or, councils are having to pay these people over the odds on their own freeholds to house homeless families. To add insult to injury, rooms in flats built to Parker Morris standards (based on what is acceptable for residents’ health) are being subdivided to get more people in. Since these are leaseheld Councils could be doing a lot more to reclaim these flats for social housing – often they are breaking the lease agreement. Again another quicker fix would be to demand that anyone buying ex-LA property live in it as their only home; and then move on requisition flats in private developments where the property is under- or not used.

        A similar approach is being taken by housing campaigners in Berlin, which I think homelessness charities like Shelter should adopt, rather than the incessant call for more building. https://www.bbc.com/news/world-europe-47839821

        As Jan proposed below, some Councils have doubled council tax on underused property but while it is effective in bringing property back into use (cf Camden), it has had no effect on rent levels.

        I work with street homeless and people at risk of homelessness in my day job. This is an emergency. We don’t have time to mess around with monetary policy as the prime mover. People are literally dying on our streets.

          • You are confusing cause and effect. The remedy is not more “charitable” activity but a return to a little Victorian rigour. Why not arrest all homeless people on the streets as vagrants? They end up in a police cell where at least they wiil be warm and fed, The following day a magistrate hands down a mandatory 6 day sentence then the social services have a chance of dealing with them,
            Too expensive you say; perhaps too expensive but this is the best solution; not useless hand-wringing by charities.
            I pay a lot of taxes but I would be happy to have these spent on an effective solution. Incidentally we need some drug reform but don’t get me started on that!

  4. Governments do not need to “help” with all the Help To Buy etc schemes which just serve to push up prices. There is no housing shortage; some is in the wrong places and a lot is unaffordable. Just look at all the empty flats in London many owned by foreign nationals. We don’t need to keep building but we do need to make it difficult and expensive to keep properties empty including holiday homes etc. Doubling council tax on second and/or empty homes would be a start.

    Intervening and trying to control the housing market would likely lead to many unintended consequences and would probably be disastrous.

    • Hi Jan

      I wonder how many of the flats being built not far from me at Nine Elms will be occupied? As I have just replied to BarbJ younger friends of mine are either frozen out or have to pile on the debt just to get shared ownership.

      There is a little hope from the way that the buy to let bubble is deflating. There is nothing wrong with some people making a living out of it but it was growing so fast that it became too large.

  5. Firstly i have to say John Healey is rewriting history as he seems to totally ignore the 12 years before 2009 where he helped oversee the biggest property bubble in UK history.

    But to include house price inflation when house prices are at what must be their absolute peak is ridiculous, what happens if prices drop 10% a year which is more than possible, will he be getting the BoE to lower rates.

    This moron wants to extend Help to Sell to 2027, the only way his party will lower house prices is by being financially illiterate and it being by accident and most certainly not by design.

    Choice between the blue and red team is akin to choosing whether to put in front of the firing squad or receive lethal infection.

    • ” Choice between the blue and red team is akin to choosing whether to put in front of the firing squad or receive lethal infection.”

      oh no no, the choice is whether you pay for the bullet or the State does….( your relatives will then be forced to pay for a “victims” levy… )

      Forbin

  6. Hello Shaun,

    So it looks like by posit on the CPI rate being the Creative Price Index – one made up of everything that’s falling in price , is proving to be true ?

    Forbin

    • Hi Forbin

      I saw someone on twitter earlier pointing out that in the US there was pretty much no inflation as long as you could get by without food or energy. So the message is getting out there and maybe next time William Dudley takes a stroll in New York there will be a crowd shouting ” I cannot eat an I-Pad” not just one lone voice.

  7. The above measures if enacted would put the government in direct conflict with the precious as the Bank of England has been implicitly forcing house prices higher for over thirty years now and is never going to carry out policies such as those proposed if they result in house prices remaining static or falling.

    Moreover, Mark Carney and his bunch of yes men have, to even the most casual observer of their policies and statements, been shown to place the housing market above everything else in their list of priorities and will forcefully resist such measures.

    I also found it highly ironic that here have been voices recently clamouring for house prices to be included in the inflation calculations, words like door and stable spring to mind, and here I go again being cynical, but where were those voices when prices were rising? Or do they only want them included when prices start leveling out or falling like they are now?

    The housing bubble is an extremely complex construct produced by decades of interference by various governments and central bank and local government planning and zoning policies, isn’t it typical of another potential government apparatchik to suggest one blunt tool to try and correct decades of manipulation, thus further complicating an enormous problem that requires a co-ordinated set of policies that would try and make houses more affordable.

    But then that just reminds me of Ronald Reagan’s old joke about the most frightening words you could possibly ever hear:
    “Hello I’m from the government and I’m here to help……..”

    • Hi Kevin

      I also find some wry humour in the fact that plans are appearing to deal with high house prices just as the market is turning overall. If London catches a cold which it has then it tends to spread. The mere absence of a new Bank of England plan to boost house prices may have done the trick.

      Also the FPC is simply not of the calibre to do this sort of thing even if it wanted to and as you say many of them have been involved in the moves to boost house prices.

  8. Hello Shaun,

    so perhaps the BoE will follow the ECB re : ” the ECB is again looking for ways to stimulate inflation” Reuters news.

    Seems a reasonable position then that house inflation will not be included in CPI …..

    Forbin

    PS: I thought economic policy was to reduce inflation as much as possible – guess these days I wasn’t figuring in the huge debt pile ….

    • Hi Forbin

      Well in one area the ECB is getting with the programme.

      “House prices, as measured by the House Price Index, rose by 4.2% in both the euro area and the EU in the fourth quarter of 2018 compared with the same quarter of the previous year. These figures come from Eurostat, the
      statistical office of the European Union”

      Held back by Italy at -0.6% whilst Spain and Ireland are around 7% which makes you think about what happened last time.

  9. Great blog as usual, Shaun.
    Was the lovely Grace Blakely inspired by Mark Carney by any chance? Whenever a reporter groused about rising housing prices Carney would retort that the Bank of England did not target housing prices as if that had ever been suggested. Now Blakely is saying: let the MPC continue to target CPI inflation and the FPC target housing prices. By the way, I notice this part of her IPRR report also says: “Since lending is not the only driver of house price inflation, the government should accompany this target with active housing policies designed to increase housing supply and RESTRICT OVERSEAS PURCHASES OF UK RESIDENTIAL PROPERTY.” (Emphasis added.) Unfortunately, the recommendation on restricting overseas purchases isn’t fleshed out in any way.
    Although it looks like a bold new initiative, it is in a sense consistent with a central banking orthodoxy these days that regulatory policies rather than monetary policies should be responsible for taming unruly housing markets. It is certainly very much in the saddle here in Canada. The trouble is that low interest rates are going to pump up all kinds of prices: in equity markets, non-residential real estate and so forth. If the response to this is always regulatory we will never get back to normal interest rates.
    You rightly don’t accept leaving housing prices out of the BoE’s target inflation indicator and wrote: “I would update the RPI ( using the RPIX version to exclude mortgage costs) so that it explicitly has house prices rather than reply on them implicitly via depreciation and as a stop-gap we could drop out fashion clothing to trim the formula effect.” I would suggest a friendly amendment to this proposal: one use the RPI excluding mortgage interest and council tax adjusting for the full formula effect (which was 0.6 percentage points in February 2019). No-one, including you, has ever offered a convincing argument that the 0.4 percentage points of formula effect that existed in December 2009, before the changes in the clothing sample, represented anything much besides measurement error. The experimental quarterly CPIH(NA) series calculated by ONS quite appropriately excludes council tax. It is only a historical fluke that the original inflation target indicator used by the Bank of England didn’t exclude council tax. The December 1989 Treasury Department note that served as a first draft for inflation targeting spoke of “RPI ex-MIPs [mortgage interest payments] and similar measures ex-community charge etc.” I would also add stamp duty to the series. It is only because the ONS switched from calculating an RPI to a zombie RPI that stamp duty is not already part of the RPI: Paul Johnson noted it was anomalous that stamp duty was not part of the RPI in his 2014 report.
    Hard to believe it has been 40 years since the opening night for Starmania, much the most popular Canadian rock opera ever:

    Great blog as usual, Shaun.
    Was the lovely Grace Blakely inspired by Mark Carney by any chance? Whenever a reporter groused about rising housing prices Carney would retort that the Bank of England did not target housing prices as if that had ever been suggested. Now Blakely is saying: let the MPC continue to target CPI inflation and the FPC target housing prices. By the way, I notice this part of her IPRR report also says: “Since lending is not the only driver of house price inflation, the government should accompany this target with active housing policies designed to increase housing supply and RESTRICT OVERSEAS PURCHASES OF UK RESIDENTIAL PROPERTY.” (Emphasis added.) Unfortunately, the recommendation on restricting overseas purchases isn’t fleshed out in any way.
    Although it looks like a bold new initiative, it is in a sense consistent with a central banking orthodoxy these days that regulatory policies rather than monetary policies should be responsible for taming unruly housing markets. It is certainly very much in the saddle here in Canada. The trouble is that low interest rates are going to pump up all kinds of prices: in equity markets, non-residential real estate and so forth. If the response to this is always regulatory we will never get back to normal interest rates.
    You rightly don’t accept leaving housing prices out of the BoE’s target inflation indicator and wrote: “I would update the RPI ( using the RPIX version to exclude mortgage costs) so that it explicitly has house prices rather than reply on them implicitly via depreciation and as a stop-gap we could drop out fashion clothing to trim the formula effect.” I would suggest a friendly amendment to this proposal: one use the RPI excluding mortgage interest and council tax adjusting for the full formula effect (which was 0.6 percentage points in February 2019). No-one, including you, has ever offered a convincing argument that the 0.4 percentage points of formula effect that existed in December 2009, before the changes in the clothing sample, represented anything much besides measurement error. The experimental quarterly CPIH(NA) series calculated by ONS quite appropriately excludes council tax. It is only a historical fluke that the original inflation target indicator used by the Bank of England didn’t exclude council tax. The December 1989 Treasury Department note that served as a first draft for inflation targeting spoke of “RPI ex-MIPs [mortgage interest payments] and similar measures ex-community charge etc.” I would also add stamp duty to the series. It is only because the ONS switched from calculating an RPI to a zombie RPI that stamp duty is not already part of the RPI: Paul Johnson noted it was anomalous that stamp duty was not part of the RPI in his 2014 report.
    Hard to believe it has been 40 years since the opening night for Starmania, much the most popular Canadian rock opera ever:

    • Hi Andrew and thanks for the musical link

      The exclusion of foreign buyers is becoming something of a policy standard. I can see the arguments for it ( the various boos around the world) but can see a problem imposing it on such an international city as London. What about the worker from abroad? The minute you include them then big money will pour through that loophole. Also it is another boom/bust move as Nine Elms just up the road from me would be empty like in a science fiction disaster film.

      Actually from the period not so long ago when RPI was ~1.2% over CPI a 0.4% formula effect seems rather refreshing. I think our discussions are pretty much the only place RPIJ gets a mention these days and that is wrong as that is a better alternative then any of the CPIs.

      Do I understand you correctly that you would put Stamp Duty in the RPI but take council tax out?

      • Thank you for your reply, Shaun. Sorry I sent the same message twice. Luce Dufault is from Ottawa like myself. She wasn’t part of the original cast of Starmania but played Marie-Jeanne in the 1993 revival. I wouldn’t take council tax out of the RPI but would recommend taking it out of an RPI-based target inflation indicator for the Bank of England. Stamp duty is a tax paid on the purchase of a home so should be in scope, for both the RPI and the target inflation indicator. Council tax is not a tax on a particular good or service, so is excluded. I am no longer a fan of the quarterly OOH(NA) series calculated by the ONS, but I believe it does get the tax treatment right for a target inflation indicator: stamp duty in, council tax out. On the other hand, the OOH(NA) series underweights dwelling insurance premiums in a way the RPI doesn’t, and that’s inappropriate even for a target inflation indicator. Regardless of whether Brexit happens or not, I don’t think any longer that the UK should attach a lot of weight to what the ECB’s target inflation indicator will look like in 2050. There are big problems in the existing HICP methodology as well as the reform proposals and the pace of reform has been glacial. The UK should channel its inner William Pitt the Younger: save itself through its own exertions and Europe through its example.

  10. As I have mentioned before (in regards toronto):
    1. A squalid 3 storey $c1 million building is bulldozed for a parking lot.
    2. “Negotiation” with the city allows you to build 20-30 stories
    (100-150 units).
    3. Stock plan building costs $300 a square ft.
    4. Market value $1000 a square foot.
    Who benefits from this monetization game?? I have seen the numbers. Dig deeply my friends!! Excellentttt blog as usual shaun.

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