Back in the Spring we reported how the Bank for International Settlements was concerned that ultra-low interest rates were fuelling another bubble in house prices and that that was not a good thing unless you were already mortgaged up to the hilt. Well it seems that neither Politicians nor Central Banks are interested in listening to the point. In fact at a recent Panel discussion hosted by the IMF Claudio Borio of BIS came in for a lambasting from the other Panelists when he repeated past warnings. Borio’s point is that it is low interest rates and loose credit conditions which are implicated in the development of “boom and bust” cycles and that by keeping rates low Central Banks are sowing the seeds for the next crisis. Faced with what seems to many of us to be an obvious point we have now seen a couple of members of the Bank of England’s MPC come out and state that they are not going to use interest rate policy to control House Prices but that they will need to look at macro prudential tools which include limiting LTVs and LTIs. The problem is that they seem to be behind the curve. Maybe this is deliberate.
Speaking in Switzerland the other day MPC member Sir Jon Cunliffe said:-
“The largest component of bank credit in the UK economy is of course lending to households and within that the great bulk, around 90%, is secured on dwellings. Mortgage lending is the single largest asset class on lenders’ balance sheets and the stock of lending secured on dwellings is around 70% of GDP.”
So it follows that our Banks and their Customers remain pretty much addicted to the debt – fuelled Housing Market. So have Borrowers been using the opportunity afforded by low rates to pay down debt and strengthen balance sheets? Unfortunately not, or, at least not enough. Household debt to income levels remain stubbornly high in the UK at 135% (albeit down from a dizzying 160% at the peak of the credit splurge) however, in Germany they are as low as 85% with the US at 110%. We in the UK are even more addicted to credit than the Spanish who come in at 120%.
So with the level of credit beginning to grow again the race is on for the Government to off-load its exposure to the banking sector and hope that increased capital buffers at Banks will contain the next inevitable bust.
As for the much vaunted “re-balancing” of the economy the fact of the matter is that growth is at present being driven by domestic demand on the back of easy credit. You only have to look at the market for cars and car finance for an example other than Housing. If interest rates rise then that growth will fizzle out and we then find ourselves looking at a deflationary cycle. If that happens then with rates already at the zero lower bound it seems that monetary policy will have nothing left in the locker forcing the Politicians to grasp the nettle by concentrating more on fiscal measures.