Examination of Witnesses (Questions 60-79)|
25 MARCH 2004
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 notand I think we are probably fortunatea
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,
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
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, becauseno doubt wherever we
werewe 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 pricesyou asked a question about
volatilityI 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,
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
Ms Bell: yes.