Bank of England: Interest Rates not Tool to Curb House Prices


It was pointed out this morning by BOE deputy governor Dame Nemat Shafik that controlling housing bubbles like the one which seems to be developing in the UK housing market right now is not really a job for interest rates.

This does beg the question however, if we can’t or shouldn’t use interest rates to cool the housing market in times of overheating, then what do you use? This question is especially prevalent when we have initiatives such as ‘Help to Buy’ in place, a scheme which will obviously have an unnatural effect on the normal workings of the housing market, as you are allowing people to buy a home in times where market conditions would ordinarily have prevented them from doing so. Couple this with the persistent low interest rate environment that we currently have and also a lack of adequate housing supply and is it any wonder that house prices are in danger of getting out of control once more?

So we ask the question again, if you’re not going to use interest rates to curb excessive house price growth, then what do you use? Do you remove stimulus measures such as Help to Buy from the market, meaning the housing market can begin to more accurately mirror the current lending environment? Do you place extra curbs on the amount of money which banks are able to lend on certain mortgages during these times of extended low rates? Will any of these measures be enough to cool things down?

My biggest worry with the way the housing market is going right now is that the longer we leave interest rates at record low levels, the more people will expect them to remain this low indefinitely. If this attitude does creep into the general psyche, then it stands to reason that people will be more likely to borrow more than they can really afford to on a mortgage or other large purchases, as they become used to rates being so low and feel that this is ‘the new normal’, only to then find that they are massively over-committed when interest rates eventually do rise. This could in turn lead to repossessions, house price drops and a mass of people trapped in houses due to negative equity. This situation sounds all too familiar, doesn’t it?

If the BOE remain adamant that they aren’t going to increase rates just to cap house price growth then other measures need to be put in place to do this, to try and mitigate the risk of people overcommitting on mortgages that in a ‘normal’ interest rate environment, there’s a good chance that they won’t be able to afford.

I don’t claim to be an economist by any means but something just seems a little off kilter to me with the housing market right now. If you’re going add stimulus to this market in the form of low interest rates and housing schemes like ‘Help to Buy’, then it should come as no surprise that prices in the housing market are rising, and rising fast. If you don’t either remove the stimulus or introduce some extra measures to curb house price rises – which the BOE say they are considering – then it is likely that prices will continue to rise as investors also jump on board and speculate in the market to make a quick buck. Many experts are starting to believe however that a housing correction is already on the cards.

At some point, if we are ever going to have a ‘normal’ functioning housing market once again, then stimulus is going to have to be removed. When this does happen you have to ask, what then for the housing market? I do appreciate the concerns over supply, of course. Taking everything into account it does seem that we are going to be in for an interesting few years with the housing market one way or another.

One Response to Bank of England: Interest Rates not Tool to Curb House Prices

  1. Mike Rawson says:

    I think the real problem is on the supply side – we just don’t build enough houses for the growing number of households in the UK. The red tape needs to go.

    Dropping help to buy would be good (but won’t happen because of politics) as would limits on salary multiples (though an increasing number of people now buy without a mortgage).

    Higher interest rates would also help in the end, but it will take years for us to reach levels that would have an impact.

    I think the silver lining might be Stamp Duty. It’s so high now at the top end that the central London market is starting to lock up.

    It’s possible that this could ripple out from the centre, which would cool things a bit.

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