1.
Special Measures: Is housing
policy at a turning point?
Tuesday 29 October 2013!

2.
Ruth Davison, Director, Policy
and External Affairs, National
Housing Federation

3.
Josh Miller, Senior
Economist, RICS

4.
Strategic Society
Special Measures: Is housing policy at a turning point?
Is it time for a second nominal anchor in the UK?
Managing house price inflation with macroprudential
tools
Josh Miller
joshuamiller@rics.org
Senior Economist
Royal Institution of Chartered Surveyors
www.rics.org/economics
29th October 2013

5.
Setting the record straight!
On September 13th, RICS published a discussion note entitled:
“Is it time for a second nominal anchor in the UK?
- Managing house price inflation with macroprudential tools”
Media interpretation: “RICS calls for 5% house price cap to prevent market
bubble”
However, in this note:
• We did NOT use the word “cap” at all
• We did NOT advocate any form of direct price controls
• We did NOT claim the market was a “bubble”
• We did NOT reference any government schemes (help to buy, FLS)
This was a paper on financial stability and modifying the policy framework to
manage future housing bubble risk
29th October 2013

6.
Some context
Two major changes with respect to central banks’ view of asset prices:
1) ‘Conventional wisdom’
! Pre-crisis thinking (‘mop-up’ doctrine):
a) central banks should take a passive role during an upswing in asset prices;
b) and then only respond by easing monetary policy if a crash in prices follows
! Post-crisis thinking:
a) Central banks should take an active role during an upswing in asset prices
b) But use ‘macroprudential tools’ rather than monetary policy
What are macroprudential tools? Measures regulate the banking sectors
approach to credit, liquidity and capital
29th October 2013

7.
Some context (continued)
2) Institutional change
! FPC put on statutory footing April 1 2013 (Financial Services Act 2012)
•
FPC now has formal responsibility for financial stability AND new
macroprudential tools to achieve it
•
!Come the next housing boom, it is NOT a question of ‘if’ the FPC will
intervene, it is a question of ‘when’
•
The FPC can not credibly sit on the sidelines
29th October 2013

8.
What did we say then?
1) The BoE/ FPC will be tested by events sooner or later, such as another house
price boom
2) Market events will force the BoE/ FPC to take action and deploy their
macroprudential tools, whether they like it or not
3) In other words, the BoE/ FPC will be forced to reveal their policy preference
with respect to house price inflation i.e. the rate of house price inflation that
triggers action, whether this preference is well understood by the public or not
4) The real question is: should this preference be known by the wider public?
5) We argue the case for transparency; an explicit policy preference
29th October 2013

9.
What could an explicit policy preference look like in practice?
1) Choose a well regarded national house price index
2) Choose an appropriate tolerance threshold
3) When annual house price growth exceeds that threshold, gradually tighten
mortgage focused macroprudential policy (until the house price growth falls
back below that threshold)
Sound familiar? Not a million miles away from inflation targeting; we have a
2% inflation target set on the Consumer Price Index, and when inflation is
forecast to exceed 2% in the medium term, interest rates begin to rise
Two further issues:
A) What is an ‘appropriate’ tolerance threshold?
B) Which macroprudential tools?
29th October 2013

10.
What is an appropriate tolerance threshold?
1) We suggest a 5% annual growth threshold; this figure is a starting point for
discussion, not a definitive conclusion
2) Why 5%? In the long run, average nominal house prices should rise in line with
average nominal incomes; this has averaged about 3% annually since BoE
independence (June 1998) and inflation targeting (October 1992)
3) But there are extra complications…supply constraints
4) The income impact on prices of supply constraints amounts to 0.6 i.e. 10%
increase in incomes raises house prices by 6% more than they should do in
the absence of these constraints (DCLG)
5) As a result, 3% income growth will boost prices in the UK by an additional 2%
(3*0.6 = c.2%). Therefore, a sensible threshold may look like 5% (=3%+2%)
6) We are open alternative threshold suggestions
29th October 2013

11.
Which macroprudential tools?
1) Currently the FPC has recourse to the Countercyclical Capital Buffer (CCB)
and the Sectoral Capital Requirement (SCR);
2) Both of these tools essentially enable the FPC to require the banks to set aside
more capital than they would otherwise do, shrinking the available lending pot
3) The CCB is economy wide, the SCR has a sector focus
4) In addition, the FPC has recourse to monetary policy as a final straw
5) However, we argue rather than having a monetary policy backstop, the tool kit
can be broadened with additional mortgage focused macroprudential tools
such as caps on LTVs ratios, LTI ratios and amortisation terms
6) Caps on LTVs and LTIs are the principle tools used in other countries to
manage their housing markets, so its stands to reason that they should at
least form part of the backstop in the UK
29th October 2013

12.
What purpose would an explicit policy preference serve?
1)
It would help anchor private sector expectations around the
policy goal
FPC’s
! thereby going some way towards limiting excessive risk taking by the
household and banking sectors and the build-up of financial imbalances
i.e. debt
! If the private sector expected the BoE/FPC would step in at the 5% mark (or
whatever the threshold is), they would build that assumption into their own
plans and behaviour; they would be less compelled to join the herd
2) The extra transparency would legitimise the FPC’s actions
! thereby enhancing its credibility as an independent unelected body
! Credibility is crucial for an independent unelected body; if it is perceived to be
lacking legitimacy, it runs the risk of being short lived.
29th October 2013

13.
Health warning!
1) This is not a panacea to end all financial crises
2) This policy idea CAN NOT be implemented as a stand alone
! it carries its own set of risks (principally, limiting upward price discovery may
exacerbate housing shortages)
3) It therefore needs to be part of a package of measures than address these
risks
! housing supply issues and reform on the planning system would need to be
revisited
29th October 2013

14.
Toby Lloyd, Head of Policy,
Shelter

15.
Until there’s a home for everyone
A home for your children
The impact of the housing shortage and what must be done
Toby Lloyd
Head of Policy
Wednesday, 30 October 13
1

16.
Housing markets have detached
themselves from the economy
Source: Nationwide
2

17.
Housing markets have detached
themselves from the economy
Source: DCLG, GLA
3

18.
Housing markets have detached
themselves from the economy
Source: Nationwide
4

19.
Housing markets have detached
themselves from the economy
5

20.
What impact is this having?
6

21.
Source: ONS
7

22.
A decade of growth and change in renting
Change in % of all households,
Census 2001 - 2011
8
Change in private renters’ household composition
English Housing Survey 2007 -2011

23.
Impact on families and poverty rates
! Two in three renting families
want to own but don’t think
they’ll ever be able to afford
! Fewer than one in 10 renting
families ‘value the flexibility
of renting’
! 44% of renting parents feel
their children would have a
better childhood if they had
more stability
! Fewer than half of renting
families can save more than
£50 a month
9

24.
Social impacts of instability
Community participation in Camden 2008
90"
% of residents by tenure
! Reduced sense of home
! Lower community
engagement and voting
! Educational impacts
80"
70"
60"
50"
40"
30"
20"
10"
0"
Private renters
Social renters
Owner occupiers
10

25.
Economic impacts of unaffordability
• One in five businesses regard house prices as a
constraint to business expansion in their region
• Rising to 44% of London firms
11

26.
Economic impacts of unaffordability
Average rents as a proportion of average incomes
by London constituency Source: Rentonomy
12
London rents and wages Source: ONS, DCLG

27.
Time for bold solutions…
13

28.
Solutions:
! Better renting now
- Stable Rental Contracts
- Improve standards and conditions
- No letting agent fees
! Better intermediate options soon
- A permanent middle market
- More diversity of housing options to suit diverse economies
! Better supply…. when?
- More and better new homes
14

29.
Reversing decades of under supply
15

30.
Reform as well as investment
16

31.
Not just policy radicalism, making
the case differently
17

32.
Matt Griffith, PricedOut

33.
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