Bank of England throws egg all over RBA, APRA


Of all of the financial systems in the world, Australia’s is most similar to the UK. Of all of the restrictive housing planning systems in the world, Australia’s is most similar to the UK. Of all of the house price boom and bust cycles in the world, Australia’s is most similar to the UK. The Bank of England also practices inflation targeting (though its cap is 2%). The UK and Australia share a similar economic model reliant upon external borrowing to fund consumption and low export-to-GDP ratios but the main difference is that the UK economy is a more diverse mix of value-adding  sectors with a much higher contribution from manufacturing.

But today there is one very new difference. The UK has announced it will henceforth practice macroprudential regulation to control its housing cycles and prevent them from hollowing out the economy.

From Coopercity:

When Julius Caesar took his army over the River Rubicon in Northern Italy, he changed the rules of ancient Rome forever.  This morning we have seen a Rubicon moment for British banks and building societies.

The announcement that the Bank of England is to limit loan to income values for mortgages is a significant point in this country’s financial history.  As Mark Carney stated, such restrictions occur elsewhere but not in the UK.  It is a sign of the damage that the housing boom and bust did to the country’s financial system and economy that this step has been taken.  It highlights the increasing regulatory control of the financial sector.  And despite the crisis beginning almost seven years ago, the increase in regulation is still ongoing and not expected to ease anytime soon.

In Jan 2011 Bob Diamond, previous CEO of Barclays famously said to the Treasury Select Committee “There was a period of remorse and apology for banks – that period needs to be over.”  Well he completely missed the mood of the country, its politicians and regulators.  The regulatory pendulum is now swinging firmly in the opposite direction of the loose wild days that made Diamond (and also broke him).

At the moment, the new restrictions seen relatively painless for the banks.  But the point is that the Bank of England now has this power.  Restrictions can always be increased, once created.

Although I am against interventions in the free market as a general principle, I still think this is a good idea.  Time after time all around the world, not just the UK, property boom and busts have occurred with alarming regularity.  They do serious damage to the financial system and therefore the economy.  We cannot rely on the banking industry to learn from the past and not over lend in the boom times.  It has proved itself incapable of such responsible behaviour.  Restrictions on mortgage lending are an alternative to using interest rates that also impact the rest of the economy.  It is a sound plan.

At the moment the plan is to limit 15% of all new mortgage lending (per bank)  to 4.5 times income.  Carney admits this will have little impact currently, but may do so in a year’s time.  He also wants banks to check affordability of mortgages by assuming a 3% point increase to the lending rate.  The plan is in a consultation phase at the moment and the new rules to be implemented by October 1st.

“The recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples”:

The Share of new mortgages with LTI multiples above 4.5 has risen to a new peak:

This is a relatively scary chart, particularly the LTI >4 line in green.  LTI of 3-3.5 is regarded as affordable but getting to 4 times and over, much less so.  This chart shows that currently over 20% of new mortgages have a LTI ratio of over 4, up from close to zero pre the crisis.  The >4.5 LTI line in purple shows why the new limit at 15% has no impact currently – only 10% of new mortgages are being written with a LTI of over 4.5 times.  However the Council for Mortgage Lenders has noted that the “London market will be the main place that notices the 15% limit on 4.5x income. 19% of London loans were 4.5x or more in Q1”.

But you have to remember that the past five years has seen almost zero wage growth whilst property prices in some areas continued to head higher.  That makes LTI ratios strained until wages pick up (which is expected to occur as unemployment falls and skills shortages emerge).  The good news for financial stability is that loan to value ratios have only risen a little as larger deposits have been required by weak banks.

New Mortgage Lending at high LTV ratios has risen modestly:

Carney’s argument against over indebted Britons is that they can cause economic instability. By being more indebted, they cut spending far more when times are difficult.  Hence making economic weakness worse.  Hence his argument as to why these enw rules are good for macroeconomic stability.

There is criticism that Bank of England’s low interest rates and QE created the recent house price boom to start with.  But that is slightly unfair.  The real boom has been in London and that is partly a result of the safety and attractiveness for foreign buyers in uncertain times. To engineer a UK recovery, it was a good idea to help consumers to spend and feel more confident which is best done through a stronger housing market.  The consumer recovery has given businesses the confidence to spend too and now the recovery is broadening out.  It is now sensible for the BofE to gain these new powers and send a warning shot over the bows of the banks that restrictions may get tighter if needs be.  Lets face it the banks have barely recovered from the last crisis, it is way too soon to be embarking on a new one!

So there you have it. The Poms now have the system to control house prices without raising interest rates that we need far more than they do. After all, the pound has been weak anyway on QE. It will curtail the London property price blowoff  without ruining the wider economy and protect the UK economy from the accelerating cycle of currency wars.

Meanwhile, we will be protecting our financial system and productive economy with Luci Ellis’ ridiculous stick figures.

David Llewellyn-Smith
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  1. migtronixMEMBER

    Cable rallies. I guess the market thinks the UK is out of the woods even as France wanders in deeper — we’ll see, we’ll also see if they actually bother to cool the housing market but its certainly encouraging…

    AUD rallies too

  2. It’s likely to take 25 years of net $zero to bring the New Zealand property market back into the 3.5/4 times range. The chances of no movement over that time? Also zero. So somewhere in that time frame is a one-off, or series of, falls to combat the ever present threat of price rises. I’d wager, Australia is somewhat similar….unless of course, we both get it out of the way early and hold that ‘gain’ 🙂

    • migtronixMEMBER

      Little help J, NZ trade balance print red and NZD shoots up?

      Disclosure: I was long audnzd 🙁

    • migtronixMEMBER

      Never mind trade’s coming back my way so I’ll let that curiosity stay that…

  3. “A large cohort of home buyers drives up real estate as demand exceeds supply, and those who get in early are handsomely rewarded. Those seeking similar returns provide the fuel for further advances. This is the basic story of housing from 1974 to 2006 and the stock market from 1981-2014, as the Baby Boom cohort bought houses and saved for retirement via stock and bond mutual funds. As the Boomer cohort sells its homes, bonds and stocks, supply will exceed demand and prices will decline, especially if household capital and access to credit are also declining. This selling cycle will also be self-reinforcing.”

    • There is something to think about in this, but I reckon demand from geared rent seekers will exist to fill this void as there is a greater and greater concentration of assets in fewer and fewer hands.

      The usury machine owns this world, it will not be changing any time soon. Voters may choose to regulate this behaviour but I doubt they will have that much coherence or sense.

      • Perhaps. But if this is reality “In that bygone era, there were as many as 16 workers for every retiree. Even 4 workers for every retiree is a sustainable level if energy remains cheap and full-time jobs remain plentiful…. As Boomers retire en masse in the decade ahead and full-time employment stagnates or declines, the ratio will slip to 1.5-to-1 or even lower.” it will be inetersting to see how it all plays out! (same article)

      • casewithscience

        With a cash rate of 2.5% max in the developed world and secured lending rates at 7-10% max in the developed world, the usury business seems like a pretty poor choice of wealth generation.

        Just my two cents.

    • Not in the same manner.

      From “Negative Gearing – The Tax Institute” – can’t link as I’m having Google problems at the moment.

      Whilst negative gearing is recognised around the world, how that loss is then utilised within the taxation system differs between countries, as can be illustrated when comparing Australian to the United Kingdom.

      In Australia, taxpayers can deduct their net loss on negatively geared assets (e.g. residential property and shares) against other types of income, including salaries or wages and business income. The position is unaffected whether the taxpayer owns more than one particular asset or a combination of asset types. Further, there is generally no cap applied to the amount that can be recognised in any one income year.

      However, the position in the United Kingdom is different. In the United Kingdom, if a taxpayer makes a loss on an asset, that loss is quarantined. However, where the taxpayer owns more than one asset, then any loss made can be applied against the profits of another, in the same income year.

      If after applying the loss the taxpayer is still in an overall net loss position for the income year, then that loss can be carried forward and utilised in future income years.

      Any unapplied losses can then be offset against the capital gain of the eventual disposal of the property.

  4. Alas, in the long run, all that will be achieved from the introduction of macroprudential is that the authorities will be given the powers to more easily engineer an epic economic crash … for the benefit of their banker mates.

    The reason this is so, is because the most fundamental dynamic of the economy — the interest-based “money” creation machine — has not been altered.

    Fact 1: Usury-based “money” demands ever-rising ‘growth’ in the quantum of loans, in order to sustain the payment of (uncreated) interest from the rest of the economy to the banks. Repayment of loan principle destroys “money”; therefore, ever-more new loans must continue to be created, in order for the rest of the economy to obtain the extra “money” needed to pay their “interest” obligations.

    Fact 2: As household debt levels inevitably rise in concert with the “money” (principle, + interest obligation) supply, a point must inevitably be reached where the desire / ability to take on more debt begins to lag behind the rate of growth that is actually “needed” in order to sustain the usurer’s business model.

    Fact 3: As seen in this post, the inevitable consequences of Fact 2 are that (1) central usurers will lower the OCR to make borrowing appear more attractive / “affordable” (“stimulate”) to an already over-indebted household sector, and (2) commercial usurers will weaken their lending “standards” to achieve the same end — make borrowing appear more attractive / “affordable”.

    Fact 4: The implementation of Fact 3 can only sustain the “necessary” (for the usurers) continued rate of growth in “money” supply by drawing more people into debt, and/or more people into increasing their existing debt, thus, merely worsening the basic problem — too much debt + interest obligations, versus the economy’s total capacity to generate real production/value via external sales.

    Fact 5: Introduction of macroprudential rules directly impacts on Fact 3 (2) — the commercial usurers’ ability to “extend and pretend” via weaker lending standards — and thus, directly impacts on Fact 2, the problem of rate of growth in borrowing / new “money” creation lagging that which is “needed” to sustain the usurers’ business model.

    Fact 6: Armed with macroprudential, the authorities are empowered with the ability only to trigger an economic collapse when it suits them.

    Fact 7: Given the FSB / Vampire Squidian drive to implement its “bail-in” regime to “resolve” insolvent banks G20-wide by the end of 2015, I can only view Goldman alumnus BoE Governor & FSB chairman Carney’s move on macroprudential in the UK as a deliberate preparatory step towards triggering the global economic apocalypse, once the “review” of G20 nations’ “legislative” changes to accommodate the FSB / Vampire Squid directives that is scheduled to begin from the Brisbane 2014 G20 meeting has been finalised.

    It is most unwise to consider the introduction of macroprudential rules as any sort of panacea for what ails us. Since it does not assist the most fundamental driver of the economy — usury-based “money” demanding ever-increasing growth in “money” supply — then all it can do is act as a trigger for greater problems.

    In my opinion, Carney’s move is most interesting for its timing. Just a further example of the internationalist usurer class — evil people, having no loyalty to any nation’s well-being — getting their ducks lined up.

    • LabrynthMEMBER

      Question, do Australian banks and the RBA practice fractional reserve banking?

    • Thank you Opinion8red for your most illuminating comments over the last few years.

      You are right – unless we address the issue of the religion of Ticket Clipping (usury) that seems to pervade almost every pore of our society and economy, then every change is just a futile swap in a shell game that we can never win.

    • Nice summary Op8!

      There is an alternative to Fact 7.

      The pollies (and their FIRE buddies) decide they can sell “QE to main street” – it just sounds better than printing money.

      This allows deleveraging by debtors and increased savings for those without debts but no loss for the banks. In fact interest rates will be higher to encourage deleveraging and to manage inflation risks.

      Managing inflation during the process will be important but it is unlikely to be a major problem due to the deflationary pressure of the deleveraging.

      Once the debt levels are reduced the process of winding up leverage can recommence.

      Generally I support this approach – over deflationary bust – but with two requirements.

      1. QE for mainstreet must be fair and equitable – say across the board cuts to income tax or GST.

      2. The banks must be put on a choker collar – 100% reserve lending. (and if necessary controls on the charging of interest)

      • Op8,

        In principle it should be pretty easy to do something that is reasonably fair and equitable.

        Rolling back some regressive taxes like GST for a period would be one approach.

        Cutting income taxes by a large increase in the tax free threshold and cuts across the other bands especially the lower bands would be another.

        Unfortunately, the biggest hurdle is the neo-classical/statist mania for funding (or pretending to fund as b_b might say) government expenditure by the issue of interest bearing securities and pretending that the national financial system is no different to that of an individual.

        Which at core is nothing more than ideological antipathy to the idea that communities of people are capable of working out ways to use human and natural resources to best advantage.

      • Cheers Op8. Though anything that I write that sounds vaguely reasonable is only the result of reading all the thoughtful posts and comments from a broad range of perspectives on MB and elsewhere.

      • Of course, what we have both overlooked in this brief discussion is the most critical element of all.


        While you and I (and, perhaps, the wider public) may (potentially) see “our” solution viz. Fact 7 as being a good thing, the usurers do not.

  5. I share 100% HnH and Macrobusiness concerns over our housing market and the risks to our economy, and broader social equality.

    But MacroPrudential is a highly questionable solution

    A pop quiz for anyone reading this thread

    If we get MacroPrudential in Australia – which groups will suffer most (ranked 1-4 with 1 suffering most), and find it harder to get onto property ladder

    – Wealthy Foreigners
    – SMSF Trustees
    – First Home Buyers
    – Low to Middle Income Australians

    I’d literally be 4,3,2,1 with the above

    Not sure thats a great result either, and a classic example of more regulation just making a bad problem worse.

    • Mining BoganMEMBER

      Wouldn’t these things done properly crack down on the foreigners? Yeah, I know.

      And if three and four are hit wouldn’t that lower the incentive for number two?

    • “Not sure thats a great result either, and a classic example of more regulation just making a bad problem worse.”

      Doesn’t that depend on what you define the problem as? I define it primarily as one of potential financial instability and MP would definitely help that.

      • Per above, MP will only increase financial instability.

        I realise that seems counter-intuitive to most. But then, most don’t understand the #1 root dynamic of the economy (usury), and that it needs ever-increasing debt growth to maintain economic stability.

        Therefore, limiting its growth tends towards instability.