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Bubble dynamics

Posted by: katalysis

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In response to recent criticism about the Funding for Lending Scheme Governor Carney has suggested that new regulatory powers can be deployed to prevent another house price bubble. Such powers have been deployed in the past in Hong Kong and, more recently, have been adopted in New Zealand. The idea is that if house prices show signs of overheating then you can restrict the supply of cheap credit by making it unattractive for banks to lend at higher LTVs or on an interest only basis. In theory it seems fine. In practice there is a fatal flaw. The problem is that there is no national housing market, rather, we have a myriad of local markets. So the fact that house prices are in bubble territory in London and posher parts of the South East does not mean the same applies to Wolverhampton. Maybe the Governor has it in mind to tell the banks to stop lending in London and concentrate on Wolverhampton instead but then again maybe not!       

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