Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60-79)

25 MARCH 2004

MR MERVYN KING, SIR ANDREW LARGE, MS RACHEL LOMAX, MS KATE BARKER AND MS MARIAN BELL

  Q60  Mr Walter: The propensity of foreigners to hold dollars is perhaps greater than the propensity for foreigners to hold sterling.

  Mr King: But there may be a bigger change in the propensity to hold dollars than a change in the propensity to hold sterling. That is what is relevant to looking at the changes in the financing flows, looking ahead. Clearly, we are not—and I think we are probably fortunate—a major reserve currency. That was one of our problems in much of the post-war period.

  Q61  John Mann: I want to come back to paragraph 14 of the March minutes and the last line of it: ". . . householders might not have taken the prospective increases in interest rates fully into account." I wanted to ask some questions about not the action of the borrowers but the action of the lenders. Do you think that banks are relaxing credit checks for some borrowers?

  Mr King: That is a question which is better put to the FSA, who have responsibility for monitoring it. But as far as we understand, there has been no relaxation. In fact, if anything there has been a recent tightening, and the default rate on mortgages is at its lowest level for a very long time, so I do not think that, in terms of the lenders' behaviour, in terms of secured lending, there has been a relaxation of standards, no.

  Q62  John Mann: Do you have no concerns about the recent press reports on self-certification mortgages, and also on multiple credit card ownership?

  Mr King: You are moving from one kind of debt to another. My comment was directed at secured lending. Unsecured lending is rather different. As I said, I do not think we feel at this stage that there is a major macroeconomic problem coming from this. That is not to say that there could not be individual problems or concerns about the way lenders are behaving vis-a"-vis particular groups of borrowers. That really is a matter for the FSA or for you to deal with if you think there is a social problem there, or excess pressure on people to borrow. That is not something which we feel is remotely large enough to be a relevant factor in assessing the macroeconomic position in the UK.

  Q63  John Mann: I take it there have been no discussions between yourselves and lenders on these issues.

  Mr King: We regularly meet with banks and lenders to assess the state of the market, and we are interested in knowing what they see as the likely trends in total borrowing and lending: what is happening. That is something we do with all the major lenders, primarily for secured lending, and that is where we have picked up the view that actually, if anything, there has been a tightening of criteria rather than a relaxation in recent months. But obviously, we do not tread on the toes of either the competition authorities or FSA in terms of the attitude and behaviour towards individual clients. That is a matter for other authorities.

  Q64  John Mann: Of course, but if there is either a significant tightening or a significant loosening, that must be an issue for yourselves to be aware of and, indeed, potentially to have a view on.

  Mr King: That is absolutely right. That is why we do keep in touch with them in order to form a judgment about where we think total lending and borrowing might go. That lies behind the comment in paragraph 14 that we do think that it would be quite understandable if total borrowing were still to keep rising at a fairly rapid rate for a while, because in part what is happening is that borrowing is catching up with the increased value of the housing stock. As older people move out of housing, they themselves have very low mortgages now relative to the current value of their house. Those houses are being sold to first-time buyers, who are having to borrow very much more than the value of the mortgage of the person vacating the dwelling. There is a natural process in the economy by which the stock of debt is going to catch up to the higher value of the housing stock, and that will carry on for a while.

  Q65  John Mann: There have been plenty of warnings from yourselves about the unsustainable rate of house price growth. Is that more unsustainable or less unsustainable than it was a year ago?

  Mr King: That is a good question. Many of the issues that have been raised today have been discussed by members of the Committee in previous speeches in the context of house prices rather than debt, and clearly, if house prices were to fall sharply, then that would trigger concerns about an adjustment in total spending. We have tried to take the views of those involved in the market itself, and we have tried to look at the factors that may affect house prices. They are clearly much higher relative to average earnings than has been the case on average in the post-war period, and we still think that the arguments that led us to expect a slow-down in the rate of increase of house prices will continue to apply over the next two years, as we have been expecting for the past year. When we first started to talk about this, house price inflation was in the 25-30% a year range. It has come down, and currently, on the two major lending indices, it is between 17-18% over the previous 12 months. So it has come down, and we would expect, on a central view, that it would come down further. But there is no doubt that it came down initially and has not continued to come down, and that has surprised us somewhat over the past six months. We do not pretend to know with any degree of accuracy what will happen here, and we shall watch carefully.

  Q66  John Mann: I have some questions on new housing stock supply for Kate Barker.

  Mr King: Can I just make one point? I am sure Kate would love to come back and talk to you on a different occasion about her report. She did speak to a parliamentary committee earlier this week on her report. If we could stick to the macroeconomic issues rather than her report, that would be, I think, appropriate.

  Q67  John Mann: I have not asked her a question yet. I only had a couple of questions on it. The first was what are going to be the benefits to the UK economy from the increase in house building that you are proposing?

  Ms Barker: I think that genuinely is a question that falls under the ambit of the report. I do not really want to go into it at any length here. The benefits to the economy are long-term, and they do not have very much to do, frankly, with what is happening with monetary policy in the short term. I set these out in the interim report. There are benefits to do with the ability of individuals to access the housing market; there are benefits to do with labour mobility, if we have a more flexible and responsive housing market; there are benefits to do with the way in which we invest our assets, how we handle our finances, how assets behave; and I think there are benefits to do with the way in which the cycle might work, particularly if you join up the kind of considerations about a more responsive stock with the kind of considerations in David Miles's report on long-term interest rates.

  Q68  John Mann: My other question on the report was about the planning gain supplement tax.

  Ms Barker: I would prefer not to get into that today, if that is possible. Thank you.

  Q69  John Mann: My only question was what effect that would have on house prices.

  Ms Barker: Since no rate has been set for that tax, I do not think it is possible to answer the question. I would not expect it to be very significant.

  Chairman: We do not want to draw you into any traps here at all. In fact, we would congratulate you on the report. Indeed, there was supposed to be a seminar with you the other day at which you addressed an all-party group, but the Chancellor came, so he took top billing. We want to explore it from the macroeconomic point of view rather than the detail of your report.

  Q70  John Mann: It seems to me in terms of this potential issue with house prices it is rather critical in terms of any macroeconomic analysis. How possible is it to bring in a planning gain supplement tax? Some commentators have suggested, as it has not succeeded previously, that it is not possible to do so.

  Ms Barker: I certainly do not think it is impossible to bring it in, provided it is set sensibly. I made it very clear when I published the report that the tax should not be set too high, that it was not an attempt to capture, as some commentators suggested, the whole of planning gain, that it should be set at what I would see as a relatively low flat rate. To answer your previous question directly, I think if that is done it would have very little effect on house prices at all, because the effect would fall back on land owners and developers and would not fall on house prices.

  Q71  John Mann: My final question is a different one. It is actually on the Lyons review and the potential tranche 2 and I just wondered, Governor, should you be included in a tranche 2? Which location in Britain would a relocation of the Bank best maximise the overall impact on the UK economy?

  Mr King: We did make a submission and we pointed out that the Bank has contracted quite markedly in size from 10,000 to 1,500. We are all just about to move into one building. It is a special building because it has all the vault space for the gold reserves. It is not easy to find a comparable building of just the right size anywhere else. I have no particularly strong views on this. What we did feel strongly was that it would be a serious mistake to split the Bank into three or four bits and put them in different parts of the country. It is important that people can move around. What we put in our submission was that it was important that the Bank stay together, wherever it were located. But I cannot see any serious case for considering moving it, unless you are looking for a reason for boosting the receipts of rail companies, because—no doubt wherever we were—we would have to keep coming back to London to talk to people involved in financial markets, government and so on. So I think it is a natural place to put the central bank.

  Q72  Mr Plaskitt: To persist with housing issues for a moment, Kate Barker, can you conceive of measures that could be taken in this country which would really dampen the historic volatility we have seen in house prices, and give us a more stable and predictable house price scenario?

  Ms Barker: It is not, I think, possible to imagine a scenario in which there would be no volatility in house prices, for obvious reasons to do with lags between demand and supply. I think it is certainly possible, and if you look across the experience of other European countries, to have markets that are less volatile than ours, but if you look right back at the work the Treasury did with the euro study, volatility is not so much the key feature of our markets. There are other markets whose volatility is as great as ours; indeed, I think our volatility is a little bit less than the average. The difficulty in the UK has been not just that we have volatile house prices, but the very strong links between volatility and household consumption. That, of course, is one of the motivations behind the other review that was conducted on long-term interest rates and why I made the point that I think it would be right to look both at that and at issues of supply when you are talking about changes in the way the housing market works relating to the volatility of the whole economy.

  Q73  Mr Plaskitt: But presumably it would be desirable as an objective in itself to try and establish a more stable housing market, would it not?

  Ms Barker: Yes, I would agree with that, and in my report I set out a number of measures, particularly to do with improving the responsiveness of land supply, which should drive towards exactly that objective. But I am just observing that I do not think on their own those measures are likely to be sufficient. There are also, of course, questions about demand and the interaction of demand and supply, once you start a cycle either upwards or downwards in the market, because of the role of expectations. Expectation is, of course, one of the big things that drives prices and drives what people are prepared to pay. I do believe that if you were to produce a more responsive supply both upwards and downwards, you would have some effect on expectations and that would help with volatility.

  Q74  Mr Plaskitt: How do you judge the relative impact between looking at the supply and demand side and focusing on land, buildings and physical structures, as opposed to the way we finance the ownership of housing in this country? In which of the two areas do you think the potential is greater to stabilise, or at least reduce the volatility in this market?

  Ms Barker: In terms of the long-term trend of what happens to prices—you asked a question about volatility—I think supply is the more fundamental factor. I think it is very different depending on the circumstances, depending on what starts to drive the cycle. If the cycle is being driven by demand increasing because people's incomes are rising, it is a question of how quickly supply cuts in. If you see house prices rising because of changes in the interest rate regime, then it is a question of finance. I do not think you can simply say one is more important than the other.

  Q75  Mr Plaskitt: You can look at it in terms of the national picture, and the graphs that we all follow in terms of house price inflation are national. Is it not the case that an even bigger problem in terms of its impact on the economy is the extreme regional variation in this market? Is there any way of tackling that in the long run?

  Ms Barker: There are certainly some problems. If you think about expectations in terms of people's preparedness to move around the country, it is not immediately obvious to me that getting regional house prices all in line, certainly at the moment, would be a desirable objective.

  Q76  Mr Plaskitt: I am not suggesting you get them in line. I do not think that is going to be achievable. I am looking at the variations in the volatility. You can get huge surges in some parts of the country whereas prices move more gradually in other parts of the country. You are never going to get the same price base.

  Ms Barker: That is true to some extent, but if you look at the experience of the last year or so, actually, the most rapid house price rises have not, of course, been in London and the South-East, they have been in other parts of the country, and there has been considerable volatility. The house price/earnings ratio does not often go so high in some of those other regions, but the volatility of prices can be great.

  Q77  Mr Plaskitt: Finally on this, if we were able to get to a situation where we had a more stable housing market, would it in your view be easier to do your job as a member of the MPC, because there would be more confidence and more predictability about issues to do with consumption, demand, household patterns of expenditure and therefore inflation?

  Ms Barker: My view would be that it would remove some of the uncertainty, for example, some of the uncertainty that we presently face with regard to house prices, yes.

  Q78  Chairman: As I mentioned earlier, there are many positive recommendations in your report, Kate, for the medium and the long term, and I think it will be very helpful for all of us. I particularly welcomed the chapter on social housing and the need for that. It was an excellent report. On the issue of fixed rate mortgages, the Miles report is out. Maybe, Marian, I could ask you this. What impact do you think there would be on the ability of monetary policy to manage the economy from a move to long-term fixed-rate mortgages? Do you think it would make the job easier for the MPC?

  Ms Bell: I think it might make it a little harder because what will then become important will be issues of long-term rates, re-financing and so on, which is outside our direct control, and the economy could then be less sensitive to movements in the rate that we do control. However, if there were benefits in terms of greater stability elsewhere, then that might offset to some extent.

  Q79  Chairman: I suppose you are thinking of America, because the Financial Stability Review noted that fixed rate mortgages in the US led to more volatile long-term interest rates.

  Ms Bell: yes.


 
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