Debate Magazine

Reinventing the Wheel, Although It's a Good Wheel to Reinvent.

Posted on the 11 July 2018 by Markwadsworth @Mark_Wadsworth

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 emphasize 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.


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