Special Measures: Is housing policy at a turning point?

Tuesday 29 October 2013!

Ruth Davison, Director, Policy and External Affairs, National Housing Federation

Josh Miller, Senior Economist, RICS

29th October 2013

Strategic Society Special Measures: Is housing policy at a turning point?

Josh Miller joshuamiller@rics.org Senior Economist Royal Institution of Chartered Surveyors www.rics.org/economics

Is it time for a second nominal anchor in the UK? Managing house price inflation with macroprudential tools

Setting the record straight! On September 13th, RICS published a discussion note entitled: “Is it time for a second nominal anchor in the UK? - Managing house price inflation with macroprudential tools” Media interpretation: “RICS calls for 5% house price cap to prevent market bubble” However, in this note: • We did NOT use the word “cap” at all • We did NOT advocate any form of direct price controls • We did NOT claim the market was a “bubble” • We did NOT reference any government schemes (help to buy, FLS)

This was a paper on financial stability and modifying the policy framework to manage future housing bubble risk

29th October 2013

Some context Two major changes with respect to central banks’ view of asset prices: 1)  ‘Conventional wisdom’

!  Pre-crisis thinking (‘mop-up’ doctrine):

a)  central banks should take a passive role during an upswing in asset prices; b) and then only respond by easing monetary policy if a crash in prices follows !  Post-crisis thinking:

a)  Central banks should take an active role during an upswing in asset prices b)   But use ‘macroprudential tools’ rather than monetary policy

What are macroprudential tools? Measures regulate the banking sectors approach to credit, liquidity and capital

29th October 2013

Some context (continued) 2)  Institutional change

! FPC put on statutory footing April 1 2013 (Financial Services Act 2012)

•  FPC now has formal responsibility for financial stability AND new macroprudential tools to achieve it

•  !Come the next housing boom, it is NOT a question of ‘if’ the FPC will intervene, it is a question of ‘when’

•  The FPC can not credibly sit on the sidelines

29th October 2013

What did we say then? 1)  The BoE/ FPC will be tested by events sooner or later, such as another house

price boom

2)  Market events will force the BoE/ FPC to take action and deploy their macroprudential tools, whether they like it or not

3)  In other words, the BoE/ FPC will be forced to reveal their policy preference with respect to house price inflation i.e. the rate of house price inflation that triggers action, whether this preference is well understood by the public or not

4)  The real question is: should this preference be known by the wider public?

5)  We argue the case for transparency; an explicit policy preference

29th October 2013

What could an explicit policy preference look like in practice? 1)  Choose a well regarded national house price index 2) Choose an appropriate tolerance threshold

3)  When annual house price growth exceeds that threshold, gradually tighten mortgage focused macroprudential policy (until the house price growth falls back below that threshold)

Sound familiar? Not a million miles away from inflation targeting; we have a 2% inflation target set on the Consumer Price Index, and when inflation is forecast to exceed 2% in the medium term, interest rates begin to rise

Two further issues: A) What is an ‘appropriate’ tolerance threshold?

B) Which macroprudential tools?

29th October 2013

What is an appropriate tolerance threshold? 1)  We suggest a 5% annual growth threshold; this figure is a starting point for

discussion, not a definitive conclusion

2)  Why 5%? In the long run, average nominal house prices should rise in line with average nominal incomes; this has averaged about 3% annually since BoE independence (June 1998) and inflation targeting (October 1992)

3)  But there are extra complications…supply constraints

4)  The income impact on prices of supply constraints amounts to 0.6 i.e. 10% increase in incomes raises house prices by 6% more than they should do in the absence of these constraints (DCLG)

5)  As a result, 3% income growth will boost prices in the UK by an additional 2% (3*0.6 = c.2%). Therefore, a sensible threshold may look like 5% (=3%+2%)

6)  We are open alternative threshold suggestions

29th October 2013

Which macroprudential tools? 1)  Currently the FPC has recourse to the Countercyclical Capital Buffer (CCB)

and the Sectoral Capital Requirement (SCR);

2)  Both of these tools essentially enable the FPC to require the banks to set aside more capital than they would otherwise do, shrinking the available lending pot

3)  The CCB is economy wide, the SCR has a sector focus

4)  In addition, the FPC has recourse to monetary policy as a final straw

5)  However, we argue rather than having a monetary policy backstop, the tool kit can be broadened with additional mortgage focused macroprudential tools such as caps on LTVs ratios, LTI ratios and amortisation terms

6)  Caps on LTVs and LTIs are the principle tools used in other countries to manage their housing markets, so its stands to reason that they should at least form part of the backstop in the UK

29th October 2013

What purpose would an explicit policy preference serve? 1) It would help anchor private sector expectations around the FPC’s

policy goal !  thereby going some way towards limiting excessive risk taking by the

household and banking sectors and the build-up of financial imbalances i.e. debt

!  If the private sector expected the BoE/FPC would step in at the 5% mark (or whatever the threshold is), they would build that assumption into their own plans and behaviour; they would be less compelled to join the herd

2) The extra transparency would legitimise the FPC’s actions !  thereby enhancing its credibility as an independent unelected body ! Credibility is crucial for an independent unelected body; if it is perceived to be

lacking legitimacy, it runs the risk of being short lived.

29th October 2013

Health warning! 1)  This is not a panacea to end all financial crises

2)  This policy idea CAN NOT be implemented as a stand alone ! it carries its own set of risks (principally, limiting upward price discovery may

exacerbate housing shortages)

3) It therefore needs to be part of a package of measures than address these risks

! housing supply issues and reform on the planning system would need to be

revisited

29th October 2013

Toby Lloyd, Head of Policy, Shelter

1 Wednesday, 30 October 13

Until there’s a home for everyone

A home for your children

Toby Lloyd Head of Policy

The impact of the housing shortage and what must be done

2

Housing markets have detached themselves from the economy

Source: Nationwide

3

Housing markets have detached themselves from the economy

Source: DCLG, GLA

4

Housing markets have detached themselves from the economy

Source: Nationwide

5

Housing markets have detached themselves from the economy

6

What impact is this having?

7

Source: ONS

8

A decade of growth and change in renting Change in % of all households,

Census 2001 - 2011 Change in private renters’ household composition

English Housing Survey 2007 -2011

9

Impact on families and poverty rates !  Two in three renting families

want to own but don’t think they’ll ever be able to afford

!  Fewer than one in 10 renting families ‘value the flexibility of renting’

!  44% of renting parents feel their children would have a better childhood if they had more stability

!  Fewer than half of renting families can save more than £50 a month

10

Social impacts of instability

!  Reduced sense of home !  Lower community

engagement and voting !  Educational impacts

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

% o

f res

iden

ts b

y te

nure

Community participation in Camden 2008

Private renters

Social renters

Owner occupiers

11

Economic impacts of unaffordability •  One in five businesses regard house prices as a

constraint to business expansion in their region •  Rising to 44% of London firms

�� � ���������� �������������

12

Economic impacts of unaffordability

Average rents as a proportion of average incomes by London constituency Source: Rentonomy

London rents and wages Source: ONS, DCLG

13

Time for bold solutions…

14

Solutions: !  Better renting now

-  Stable Rental Contracts -  Improve standards and conditions -  No letting agent fees

!  Better intermediate options soon -  A permanent middle market -  More diversity of housing options to suit diverse economies

!  Better supply…. when? -  More and better new homes

15

Reversing decades of under supply

16

Reform as well as investment

17

Not just policy radicalism, making the case differently

Matt Griffith, PricedOut

!!!!!!Strategic Society Centre!32-36 Loman Street!London!SE1 0EH!www.strategicsociety.org.uk!@sscthinktank!info@strategicsociety.org.uk!!The Strategic Society Centre is a registered charity (No. 1144565) incorporated with limited liability in England and Wales (Company No. 7273418).!!