Norway’s macroprudential lesson

From Ambrose Evans-Pritchard today comes a lesson for the RBA from the UK and Norway:

British house prices have fallen 6pc since peaking in November 2007 at an average of £181,618. The average in March this year was £169,124, according to the Land Registry.

This is based on hard sales data, unlike the asking price indexes used by the property companies. It is backward looking but not massively so.

The fall in real terms must be around 25pc by now. This is hardly yet a bubble.

It would be folly for the Bank of England to raise interest rates purely in order to break a London boomlet at time when broad money (M4Lx) contracted at a rate of -3.2pc over the last three months.

Or indeed, when UK economic output has barely recovered the lost ground from the Lehman crash, and when much of the manufacturing hinterland is still in near slump.

Such action would push sterling through the roof before recovery was secure. It would lead to an even more calamitous deficit in the current account, ceteris paribus. The deficit is already running at over 5pc of GDP on a quarterly basis (the worst in the industrial world).

The proper answer to the housing shortage is to build houses, if necessary by returning full power to councils to do it themselves.

But if the Bank wishes to contain credit, it should learn from Norway’s success. Instead of raising rates, it has used “macroprudential” tools. It cut the loan-to-value ceiling on mortgages from 90pc to 85pc. It forced the banks to raise to capital buffers further.

The Norges Bank has recommended a 1pc counter-cyclical buffer based on its view of what constitutes a safe level of credit growth.

Contrary to claims that these tools never work, they worked splendidly, as you can see from this chart today from HSBC’s David Bloom.

Norway’s house price boom stopped it its tracks. The krone fell. Collateral damage was limited.