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This is an excellent idea from Mr Turner.
Many of us have been suggesting this for years.
But how to achieve this? ...bearing in mind the intense "competition to lend" that got us into the mess.
Unlike the old days, we can now approach banks anywhere for loans, even in Europe or elsewhere.
Great idea, and would also put a stop to dangerous runaway house price booms, but difficult to achieve.

Problem with this is that when the boom is on no one knows how to define overheating.... or even how to recognise it.
It is only a that gives people insight in such instances... unless you are Vince Cable of course

HAHAHAHAHAHAHAHAHAHAHA

"Lord Turner said that in the case of an overheating housing market a superior approach might be to force banks to reduce the amount they could lend relative to the value of individual houses."

Its nice to see people catching up. I and others suggested this on this blog in 2008. And no doubt many others have suggested it earlier. To administer it link it to registered charges. If the lender can't provide the correct paperwork then refuse to register the charge on the property - that is if they break the rules they are lending unsecured.

People were suggesting long term LTVs of 80 to 90% as being the maximum. It doesn't have to be only done at the time of bubble either, it can be all the time to stop the bubble forming.

I wonder when one of these people in high positions will also say that all mortgage applications should be sent to the HMRC to stop people overstating their income on mortgage applications? that would have stopped most of the 'liar loans'.

Booms, like excessive interest rates (usury), used to be something that everyone empirically and legally understood.

We still know what usury was - charging more than 42.5 percent. I am not so sure about booms, but a housing boom is quite simple to define. When average house prices have risen to more that 3.5 time average earnings for an average house in an area. Share price booms too can be defined as when the yield of equities goes below current interest rates for example. So all in all I think booms can be defined. Pay booms too could be defined as more than the National Maximum Wage!!! (see previous postings)

However regulatory integrity and backbone has proven itself to be almost completely absent from 'the good and the great' (If there every was an oxymoron this it it!) Mervyn King knew that interest rates should have bee increased dramatically to prevent the boom that led to the crash of the noughties - but he failed to do so lacking the bottle!

I don't see Adair Turner as any more capable!

The way to reduce lending in a bubble is to increase interest rates. So better for the Monetary Policy Committee to be asked to control the inflation rate which includes asset prices.

This is exactly the sort of day to day regulation that is required.

When banks increase their lending they generate extra spending power and similarly they reduce spending power when they reduce their lending. The MPC tried to control overall spending power, or broad money supply, indirectly by varying Bank Base Rate. They failed catastrophically when the credit crunch caused a massive drop in the money supply. It would be much more effective to do this directly in future as Lord Turner suggests.

Obviously, it would not possible to control all private lending in this way, but this degree of regulation could be the quid pro quo for BOE underwriting of sterling denominated deposits in those institutions which wanted the underwriting. It would be made clear to depositors in other institutions, which would presumably offer higher interest rates, that they would not in future be bailed out by the taxpayer.

If too few banks decided to join the scheme, the government should create a fully nationally owned bank.

I predicted the failure of the housing market. It was pretty obvious for anyone wanting to get on the housing ladder without a property already that it was simply unsustainable.

Frankly, it still is that way, but we haven't seen the real market correction we need there. Might take 20 years or so to get back to normal.

Why is it that these people who are paid to manage money are unable to see booms the way mere mortals like myself do? I suspect its self interest for the most part. GB must have known there was a bubble in the financial sector when he was praising it's huge "profits" a few years ago.

Robert,
Could you explain how this policy would help the current re-inflation of the housing bubble (particularly in London where prices are often already above their previous peak)?

Given we are de facto applying this policy already (the current constraints on capital and the huge lending margins currently in evidence) this doesn't appear to be working..

To avoid housing bubbles (again focused mainly on London) we should deal with:
1) artificially low interest;
2) bankers base salaries doubling making 3.5x plus loans stretch that much further;
3) bonuses at 2-10x basic salary; and
4) sterling devaluation attracting foreign buyers

hmmm, sounds like an intractable problem..but one that must end in tears at some point when interest rates are forced up.

Well done Mr Turner.

I'd suggest non-linear and ultimately negative tax allowances interest on borrowing for propert purchase.

Low borrowing is fully deductible, high borrowing you get punished. Set the swap point to negative allowances on the basis of average prices.

It's simple and stabilises the market.

I prefer to break them up. Ideally, we would have hundreds of micro-banks, and no big ones. Each would need to cover all its loans with cash, or buy an expensive insurance policy from the taxpayers.

All foreign banks would be barred, except for those who pay us a large license fee to do business here. The licesne fee would be a bribe to make up for the losses of British jobs.

The City is too big for a tin-pot country like Britain, and we need to downsize it. This came at the right time.

This all sounds like a desperate attempt of a serial public sector job junkie to try to find another job when the Tories shut down the FSA.

Mervyn King knew he should have put up interest rates to curb the boom, but Gord wouldn't let him -- so much for the independence of the B of E!

'As he admitted, in some ways he is advocating a return to the rationing of loans, which we haven't seen in the UK for some 30 years.'

>>>>>>>>>>>>>>>>>>>

Rights - v - privileges?

As someone else said.... this is rear view mirror style economics...

We knew intervention was neccessary when the average house price started exceeding a multiple of three times a nurse's salary.

Whilst intervention might still be a good weapon to have breaking up the banks is still the better route.

Another smoke screen for the banks. This wasn't about too many loans, it was about bad loans fueled by a bonus system that rewarded bad loans for the people who created them and a collusion on the part of the banks to create an empty box that was said to underwrite the loans. It is interesting, I think mainly because no one wants to hold anyone involved in the matter accountable, that the issues are being presented as technical when in fact they were ethical. Another three card monty on the street corner....I think everyone is starting to understand that the bankers are not as smart as they pretend to be. Everyone knows someone with a stupid idea they want you to back with your money, but no expected that person to be your banker. We already know how dumb the politicans are.

This is the Adair Turner who from 2000-2006 was a Senior Adviser, Vice-Chairman of Merrill Lynch Europe

This is the Merrill Lynch that was acquired under distressed circumstances in 2008 by Bank of America

Whatever happened to interest rates as a lever to damp down demand?

Risk for existing home owners can be reduced by long term fixed rates that are sensibly priced.

That's the old US model - 30 year fixed rate - more expensive but less risky for the borrower, fewer fees for the lender.

To do what! "assess whether financial bubbles are being created and would have powers to deter lending in those circumstances." Does that mean another tosspot telling me what to do!

If inflation calculations included asset prices the Bank of England would be compelled to raise interest rates as bubbles appeared.

Had house prices been included in the inflation rate calculation between 2004 and 2007 interest rates would have been raised and a brake applied to the market.

There seems to be two insurmountable problems for Lord Turner – firstly of implementation, the UK cannot go it alone and secondly political, no government wants to stifle a nation’s aspirations, whether it is good for us or not.

History may decide the 2009 stock market rise was a bubble when surveyed from the wreckage of a crash.

Will Lord Turner have rescued the world or will our natural greed prevailed again? – Only time will tell!

I post this again.

I ask myself what are the main issues for the average Joe or Jane. And being an average Joe I think of my own experiences, namely the mis-selling and plain dishonesty of financial institutions.

And I think if I asked the average Joe or Jane; they would likely point to the mis-selling of financial products, such as
Endowment policies,
Personal equity plans,
Payment protection policies,
Equity release schemes,
Self certification and 100% + mortgages
Unfair bank charges.
Unfair mortgage penalty charges

In fact not a month elapses when some financial institution is reported to have ruined some savers or pensioners investments.

The financial industry has been regulated in the past by the following:
The Bank of England, The Financial Services Authority, The Financial Ombudsman, The Treasury, The Basel ll Agreement, The European Union.

And as I have previously mentioned that’s an awful lot of people doing an awful lot of regulating. And it hasn’t worked has it.

And what has all this regulation led to?
A massive financial crisis
Large numbers of people being systematically disenfranchised of their savings and pensions over many years.
Many people being sold hopelessly flawed mortgages which lead to their ultimate destitution and misery.
Unfair bank charges and mortgage penalty charges.

Leave the creation of money in private or corporate hands, and the future of our children is debt slavery.

The plain truth is regulation doesn’t work.

And we're now being told we need more regulation by the very people who didn't manage to regulate properly, or even at all, in the first place.

Along a number of dimensions this makes a lot of sense.

And I do believe Turner's stance in the last year or so has showed signs of good independent thinking (eg.... the socially useless portion of activity of some banks etc).

However the question always is and always has been... can you see a bubble developing/expanding when you are inside it.

It's very difficult.

This concept obviously takes as a given the existence of a central bank not subject to political influence (... even in the year or so before an election), which we hope we now have.

But shouldn't it also co-ordinate with fiscal policy?

If one took the example of the retail property sector (rather than the commercial one), the government and the whole state planning machine has been obsessed with trying effectively to subsidise (pumping huge amounts of public money into) "affordable housing" schemes.

Which is a bit stupid, when all it has really done is to help prop up the ridiculous property bubble.

This bubble has already come down a bit, but will (I think!) come down further this year, and will do more to help those who need "affordable housing" than any government fiscal schemes.

#16

You might be interested in this article about Countrywide Housing



and this one about Countrywide and GMAC

I have no idea who gave credit ratings on the related RMBS

You might also be interested to look at realtytrac.com and this to see where the foreclosures are happening.

There is a relationship between the first references and the second

I haven't really thought it through but how about capital gains tax on your primary residence as a means of controlling house price inflation perhaps on a sliding scale e.g. it reduces over the years the property is owned?

I'm sure there are some obvious holes in this but might it not be a disincentive to house price bubbles?

Ducking now.

#5 John_from_Hendon wrote:


"I don't see Adair Turner as any more capable!"

--------------------

Surely you meant to write...

"I see Adair Turner as more culpable!"

Remember....when most of the damage was being done, Turner was at the heart of the free-market anarchy free-for-all between 2000 to 2006 when he was Vice-Chairman of Merrill Lynch Europe

The fox has been put in charge of the chicken coop.

23. At 9:01pm on 27 Jan 2010, StephenBlencowe wrote:
I'm sure there are some obvious holes in this but might it not be a disincentive to house price bubbles?

Ducking now.


You are right to duck.

Infact find a bunker.

It's just another tax on trying to create some savings.

You might as well have suggested capital gains tax on having any money, as soon as you transfer it to some other asset the state takes 40%.

Now we need two bunkers and an army to protect us.

24. At 9:03pm on 27 Jan 2010, freemarketanarchy wrote:

"I see Adair Turner as more culpable!"

Remember....when most of the damage was being done, Turner was at the heart of the free-market anarchy free-for-all between 2000 to 2006 when he was Vice-Chairman of Merrill Lynch Europe

The fox has been put in charge of the chicken coop.



An excellent observation and post

dempster
Not necessarily, if it was a sliding tax it would (may) discourage short term bubbles. After all, everybody keeps saying a house should be a home not a financial speculation.

France applies this already for second homes. After 15 years there is no capital gains on resale. Can't remember the actual scale over the 15 years but all invoiced expenditure on the property is allowable when working out the gain.

Anyway as I said just a thought rather than a manifesto. I think we need more thinking and less dogma.

excessively fast

What would that be. Can it be located mathematically?

It's interesting that you mention that loan rationing hasn't been tried for over 30 years. It was probably around that time that wives started to work in the name of equal opportunity and wealth creation for the family. At that time, mortgages were limited to 2.5x combined income.

At some point, that was allowed to slip but instead of families getting richer in real terms, house prices were allowed to increase to soak up the slack. Sure the family could afford two cars and better holidays (arguably essential to support two workers) but the real change was in family dynamics. Gradually the family had less and less time for the kids. Electronic and external surrogates were employed to allow both parents to work and wind down. If you can find a better cause for the break down in family life and social values I'd be stunned.

The last decade where loans have been allowed to rise to 4x or even 5x dual income just shows how little appreciation we have for family life today. House prices haven't even normalised to 3.5x combined incomes yet and we are chomping at the bit for them to start rising again. The truth is that the house market bubble never actually burst - it just got deflated a bit. Houses are still massively inflated from where they need to be for normal families to be able to afford them and have time to raise kids with the quality time they need and deserve to flourish. This and the return to big bonuses for bankers just tells me that we have learned very little at all about the downside of greed.

How could Mervyn stop the house price escalation when most MPs were making such profits on their so-called second homes?

#29 Alistair Thomas

Good shout!

Of course you won't ever hear the likes of Cameron, Brown or Clegg mentioning this as the likely root cause of family break down in 'Broken Britain'....as all the three main UK parties all worship at the alter of mammon, aka free-market liberalism. 'Debt is Good (or should it be God)' is their religion, and free-market anarchy is their doctrine.

I strongly recommend you go research 'JadedJean' in the archives of this website for a more detailed explanation of how and why these people behave the way they do.

I don't understand this. Under the Basel II rules, the FSA already has the power to require a bank to adopt the inputs to the rating models as decided or approved by the FSA. This means that it can change the risk charge and capital applied per transaction as it sees fit.
Right now, I am still surprised that both the Fed and the FSA simply did not ask that all banks adopt the standardised model rules with all inputs delivered from the regulators.
Time Adair looked inwards - more application of existing rather than creation of new rules.

In any event, he is still just tinkering. Break the banks up and make them smaller - that is the only long term solution.

By the way - am I the only one who remembers hire purchase rules and car loan rules - with specific requirements for deposits and for repayment periods?

32,33. GVS wrote:

"Break the banks up and make them smaller - that is the only long term solution."

My solution too, but the way to do it? My thinking is tending to wards manipulating the taxation system to make if much more tax efficient to be small as a bank rather then huge and international. The risk is the dismantling of the superstructure structure of asset valuations getting out of hand or the freezing of liquidity preventing any trading of assets or working capital borrowing. But I think on balance that the risk of not doing so are far larger than of doing so.

"am I the only one who remembers hire purchase rules"

No you are not. But again without the re-imposition of Exchange Controls I don't see how national volume controls on the amount of loans can be enforced or supervised. All in all I am tending to think that some measure of Exchange Control will I am very much afraid be necessary. I recall visiting the Bank of England many years ago to get permission for running foreign currency offset accounts and having verbatim notes taken of the meeting by a stenographer clicking on her little machine - I know how much of an awful bureaucratic nightmare it will be, but some measure of management will I fear be required.

'Lord Turner said that in the case of an overheating housing market a superior approach might be to force banks to reduce the amount they could lend relative to the value of individual houses.'

I can see how rationing loans etc might prevent the sub-prime situation and might actually have great benefits in the UK where house prices mean some can't even think of owning.

But surely that does not mean that that would resolve larger scale issues like CDS that I understand were largely behind the AIG collapse and Lehman's?

'I strongly recommend you go research 'JadedJean' in the archives of this website for a more detailed explanation of how and why these people behave the way they do.'

If you go searching the archives you will find all kinds of rubbish like "the Holocaust was made up to put people off statism". It was done by Roosevelt and Stalin - who were statists in the doo-lally world of that poster. You will also find all kinds of "statistics" that won't show up at the Djemjanjuk trial (alleged Nazi death camp guard) that purport to show there could have been no Holocaust.

Hitler had "many good ideas" on race and they and the other far right activists would like " to see more coverage for the BNP".

Given that the BNP claim they are not Nazis its odd that their supporters seem to revere the National Socialism of Hitler.

A strange crew they will make all kinds of nasty posts but never really identify what they are about - possibly because they could never substantiate the allegations that they make up for the blogosphere.

Very nasty people.

#24 freemarketanarchy

"The fox has been put in charge of the chicken coop."

Given your above stated admiration of jaded_jean (#31) and that that poster declared admiration for Hitler and the national Socialists - that led to seventy million dead and left Europe in ruins - some may say (perhaps like Oliver Stone who links some of the banks strongly to Hitler) that if people let you and others of your disposition designate who should run the FSA they would have a lot more to worry about than foxes!

You either love democracy and freedom or natty little uniforms and extreme violence.

#23

An excellent suggestion which would of course actually go right to the heart of the problem by forcing people to re-evaluate the meaning of a house as a home and not some ersatz pension, savings or piggybank to dip into every so often.

However it would never be politically acceptable to any party simply because it is a guaranteed vote loser plus there would be too many exemptions and unfairness pitfalls - e.g. restricting mobility for work if you have to go, illness meaning having to move to special housing etc etc.

The simplest measure to my mind would be to provide the BOE with multiple interest rate options to set - independently from Government as now.
The commerical base rate and the savings/mortgage rate for example (sure there are other and better definitions/splits)- if housing is overheating then up the mortgage base rate which usually has an effect on housing markets. It does knock on into the general economy but would be less likely to damage business directly which would be working on the commercial rate.
The problem with the current one size fits all rate is that it is not a discriminating tool and as key factors are actively kept outside the main inflation figures.
It gives the BOE at least so far as I have thought it through the option to restrain bubbles in housing and thus some of the consumer morgage fuelled boom in future whilst not neccesarily punishing business automatically. Linking savings and mortgage rate may then permit/force a greater link between bansk desire to use savings to fund mortgages.
Clearly defined rules on what type of lending is related to what rate woudl be required but I cannot see it being too difficult if you solely looked at retail mortgage/retail savings.

Sure there are holes to be plugged but it seems to me at least a more finessed a tool for the BOE to use rather than the rather blunt stick they currently have.

However the FSA having failed miserably should have nothing whatsoever to do with it. Bank regulation should reside with the BOE where it should have remained all along.

Mr Turner may well be coming round to the idea of regulating commercial property lending, however it is way after the event. Sadly he is a bit like a first world war general always fighting the last battle. Also I was amused 3/4 days ago to read notayesmanseconomics update on the UK which referenced the alleged treatment of expenses by higher management at the FSA.

An excellent idea.

We used to have this when the BOE was the sole regulator.

The BlairBrown gang split the regulation between FSA, Treasury and BOE with the intention of concealing the bubble which was then in progress to their advantage.

Do away with the stupid FSA, get the suborned Treasury out of the loop, but most of all get rid of the criminal government and their accomplices in the opposition who have stolen our savings, betrayed our country to the EU, and murdered millions for their rich friends in the USA.

Lieber Herr Peston! Cher M Peston ! Caro Robertino !

This is London Calling Davos.

Here we have no snow. And, by the looks of the party in your part of the world, we have few bankers.

You must think rather highly of Mr A Turner. Virtually a whole blog based on a chat with him and NO mention at all about how you're getting along with your WEF pedometer and NO hint at all as to your possible presence this evening at the Piano Bar at the Europe Hotel.

Surely JP Morgan have sent you an 'invite' ? Fear not being bored...the hotel location has its own Casino just in case.

Chin-chin

I remain yours etc

Amused2Death

Once again, more proposals to plan the un-plannable ie. the economy.

Don't any politicians stand for the principles of personal and economic freedom? Are they constantly trying to plan the economy because they think they should or because they are trying manipulate it to suit their own agendas?

Let the participants in the economy determine the prices of goods and services. If we need to redistribute resources for the good of society as a whole by all means raise taxes to do so, but intervene as a last resort.

What we need is an economy where competition can thrive: monetary reform and proper competition laws will help. Bad investments should result in people losing their money, productive labour and innovation should be rewarded.

Remove the control of the money supply from the vested interests of the axis of evil (aka HM Government, Bank Of England, the banks).

Whistling Neil @ 38: Is there not a problem with differential rates in that as per a previous blog by Stephanie Flanders money is "fungible"?
Clearly the BoE *not* being allowed to include house price inflation in its interest rates calculations was a major error on the part of the government (or GB in particular if you prefer) but at the same time using interest rates to control one element of financial change (the increase in house prices) has a far wider impact; too much of a blunt instrument. With differential rates there would inevitably be a risk of a loan ostensibly agreed for one purpose is in fact used for another. ("Fungibility") and that a much better solution would be to tackle the problem in hand (excessive house price rises) in a way that leaves other areas (business borrowing) essentially unaffected. A further complicating factor is that increasing interest rates on house purchases would not only limit loans that might be inadvisable anyway but also affects those who have taken out manageable loans already, i.e. it has a retrospective component. I could also add that the current low interest rate, intended to act as a stimulant, results in savers - who almost by definition are the cautious not the reckless - getting an extremely raw deal.

Obvious methods of controlling house prices only would include:
(1) No more self - certification!
(2) Maximum loan to price ratios. (Note *price* not value!)
(3) Further to (2) this ratio to vary according to a price band; more expensive properties to require a (much?) bigger share in percentage terms from the prospective purchaser.
(4) "Sensible" (to be defined!) limit on salary multiples.
Other than (1) all the other factors can be adjusted according to circumstances, and have the advantage that they affect future purchases and not the ongoing costs of current ownership.

However no regulatory mechanism is likely until the government can be weaned off excessive spending; it has to raise the money somehow with lots of cash rolling in from Stamp Duty (and other sources, usually debt - fuelled) and until this cycle can be broken then I fear decisive action is unlikely. With the money pit that is the government debt I see little prospect of anything happening that might reduce the ringing of the Treasury tills.

A dreadful idea ..... the best regulator of the market is the price itself..... the last thing anyone wants is to burst a bubble .....leave it alone and it will stop overinflating of its own accord .....we already have variable rates of interest which are themselves overused to the point of inducing recessions and crashes, the last thing we need is another crisis precipitator.
WE BADLY NEED A BOOM TO GET CONSTRUCTION SITES GOING AGAIN AND GET THOSE HARD HATS BACK ON OUR BRICKIES!
Prices need to rise another 20% to get the show back on the road.
What about introducing variable CGT?
Notions of limiting property prices to a percentage of earnings are daft.
If prices are too high how come ownership has increased rather than fallen?
Onward-ho says no to meddlesome recession-inducers!

WE HAVE TO STOP TREATING OUR MAIN ENGINE LIKE A PARIAH!

Adair Turner is unfit to be in change or responsible for anything in the British Economy.

Let me explain: He has stated yesterday that "interest rates are too blunt a weapon" (to manage the supply of money and inflation, including asset price inflation). This argument is exactly the same argument that the good and the great used during the noughties not to put up interest rates. They kept saying the 'the country would not understand'(M King) and other such excuses not to do what they knew they should have done.

All of this nonsense about using subtle 'new' ways of controlling the economy rely on one thing that is the word 'NEW' - that is something that there is no way of actually doing. So in consequence these fools who gave us the regulatory system that substantially contributed to the size of the bubble and the crash have still understood nothing. Adair Turner, by adopting the same language, has aligned himself with the failed regulators of the last decade - he is a 'has-been' - part of the problem and not the solution.

In running the economy/money supply regulation we have to use the tools that exist - not speculate on how lovely is some mythical non-existent legislation allowed for a better way. Indeed anybody who so argues, and is responsible for regulation, is wrong - for to put forward such an argument must logically show that they knew that interest rates should have been put up (in this case), were in position to put them up (M. King) and yet they did nothing - a direct demonstration of their incompetence and unsuitability for such a responsibility. Adair Turner has shown that he still does not understand his terrible folly and is thus unsuitable to run anything.

"29. Alistair Thomas "

I agree with everything you said.

"31. freemarketanarchy"

Although you agreed with everything he said too, I don't agree with everything you said!

"as all the three main UK parties all worship at the alter of ... free-market liberalism"

No they don't. We have a monopoly/cartel controlling the supply of money to suit their own vested interests. How can this be a free-market?

#43. Radiowonk wrote:

"Clearly the BoE *not* being allowed to include house price inflation in its interest rates calculations was a major error..."

I agree with your anaylsis, but if the person designated to run such a system was a half competently trained economist and monetary manager he surely would have been expected to recognise this, wouldn't he?

Further, in such a responsible position, would it not be expected by the Country that such a person had integrity and intellectual honesty? So how on earth can Mervyn King (trained at Harvard along with Ben Bernanke) to have the gall and effrontery to so insult the Country by not resigning????

Where is his resignation!

#44. onward-ho wrote:

"we already have variable rates of interest which are themselves overused to the point of inducing recessions and crashes, the last thing we need is another crisis precipitator."

Perhaps you have already forgotten that not using the available instruments of monetary regulation was a substantial cause of the 'small problem' in the baking sector that we will have to pay for for the next thirty years. By the way we haven't got over the crisis of the noughties until we have paid off the Nation's necessary borrowings to save the banks. You cannot be taken seriously if you want to create yet another inevitable crisis before we have paid off for the last one!

Booming property prices in one area make other areas look cheap which encourages people to sell up and move, renovate, build etc...ok it increases rural prices but it creates work and reflects a change in status and desirability of rural areas....they are not the undesirable backwaters they used to be and if that means agricultural workers are priced out then councils and farmers need to help to house them like they used to and quotas imposed ,for developments with social housing included .

Sign that - heaven forbid - the economy needs to be managed beyond MPC fiddlings. Whatever next - economic management being the responsibility of the government - the end of capitalism if not civilisation!

19. At 8:07pm on 27 Jan 2010, Nick wrote:
"If inflation calculations included asset prices the Bank of England would be compelled to raise interest rates as bubbles appeared.

Had house prices been included in the inflation rate calculation between 2004 and 2007 interest rates would have been raised and a brake applied to the market."

Nick, I agree absolutely - and why was the inflation measure changed in the first place - this needs to be looked at.



Another interesting thought - if MPs hadn't had a second home allowance to pay up to £24k mortgage interest in London maybe they wouldn't have been so relaxed about the ridiculous price rises of houses!!!!

As it was the boom in rent and house prices didn't hit their salary at all as the taxpayer footed the bill through the ACA allowance!

17. At 8:00pm on 27 Jan 2010, mrsbloggs13c2 wrote:

'This is the Merrill Lynch that was acquired under distressed circumstances in 2008 by Bank of America'

Firstly Mrs Bloggs, thanks you for your links from your other postings... especiallly the recent two links regarding housing in the US.

But I fear you may be out of date with some of your nomenclature.

Merrill Lynch is no longer a separate entity and has been renamed in certain circles as Merrill Lynched .

Likewise:
The Bradford and Bingo
Northern Rocked
Her Majesty's Penury

Other bloggers may know of others...I don't recall all those I have heard mentioned.

Mr Peston surely knows some as well but is too polite and professional to tell us.

It was not a property price bubble that created the crisis in Britain, it was the drying up of wholesale credit and the US CRISIS AND NORTHERN ROCK CRISIS.

Stop blaming the booms,UK's property is not particularly dear .....have you looked at the prices in other world centres ......look at the price of a nice home in Puerto Pollensa, Paris 16eme, Pacific Palisades, Shanghai, Rome?

It woz the crunch wot dunnit!

John_from_Hendon @ 47: I suppose MK could have resigned, but apart from being a grand gesture would it have actually achieved anything? Specifically, would GB & Co have recognised that the "ignore house prices in your inflation calculations" policy he had mandated was manifestly wrong? "H*ll will freeze over first"! Unlike a resigning minister MK wouldn't even have had the satisfaction of being able to make a resignation speech in the HoC; the waters would have closed over him with barely a ripple to mark his passing.

If a finger of blame must be pointed, then Gordon Brown has to be the target; with all the crowing about abolishing boom and bust (quite what his inclusion of the word "Tory" in the original was intended to convey or conceal remains unclear) and boasting of "light touch regulation" then there is no getting away from the fact that the occupant of 11 & 10 Downing Street is the main culprit.

Others have suggested that "regulation doesn't work"; well the regulation that was supposed to be in place certainly didn't, but I don't think that it can be concluded from that that regulation is by definition going to be ineffective. Proper regulations properly applied might *just* be effective, but until someone tries that we won't know, will we?

#43

I said there would be holes in it - fungibility indeed being one possible, as you point out, however I have the (rather odd and unfashionable I know) notion that a mortgage is for the purpose of buying a house (and nothing else- i.e. not the furniture or the loft extension or anything else) and therefore at no point other than the purchase should mortgaging be allowed ideally. Remortgaging possibly but only to the outstanding loan with no extra bits of additional spare cash taken out for a holiday or new car etc. - as I said I think this notion of the house as a piggy bank is part of the problem - this would remove it. So there would in my thinking be no possibility of fungibility.
Unsecured loans or lending for other purposes would be different - indeed as now the rates on these tend to be higher as they are unsecured - forcing banks to risk them as unsecured even if the customer has a mortgage with them would restrain this possibly. Cheap funding always induces excess and the remortgaging and house price booms did wonderfully well.

Your alternatives are indeed possible alternative ways around but I wonder where the choices or changes are made and how they would get fiddled with and by whom.
Whilst they do have the improvement that costs of continued ownership are not affected they could produce some unfairnesses depending on who did the adjustments and how. Not a politician for sure I would imagine - they will just break it.

#44 Onward

You advoicate a property boom, I thought we had by now all learned that a boom is not the solution to bust but it is the prelude to bust.

Seems the less fettered the market became the worse the problem became - markets need regulation, the aspects of economics they solve are balanced by the problems in society they create.

#54. Radiowonk wrote:

"If a finger of blame must be pointed, then Gordon Brown has to be the target"

True, but we can get rid of him! You are ignoring the permanent government of the UK who are supposed to have integrity and provide the best profession advice, what of them! That is the Permanent Secretary of the Treasury - he must have and expect to take responsibility too. We select these people to be experts in managing the economy (like the Governor of the Bank) They failed - they must go.

The problem with just changing the politicians is that both parties have the same philosophy of as you put it 'light touch regulation' - this means no regulation. Indeed the Tories were the first to instigate this erroneous economic philosophy. We get rid of one erroneous economic philosophy to get the same (or even worse) in its place. This is why it is vial to get rid of the permanent government that supported this erroneous philosophy as well as changing the politicians.

#44 onward-ho wrote:

WE HAVE TO STOP TREATING OUR MAIN ENGINE LIKE A PARIAH!

-----------------------------

You are talking about our manufacturing industry!....am I right?

Increase the proportion of tax raised from property taxes and the reduction in windfall profit available will seriously restrain housing bubbles and do it far more reliably than any regulations could.

Turner can complain about interest rates being a crude weapon, but nowadays it is the only real weapon central banks have to deal with inflation - also is there not a saying about a bad workman blames his tools?

Limiting mortgages to 3.5x income is incredibly crude and in any event completely wrong - it makes people concentrate on property price rather than how much of their income goes in paying the mortage. A simple example:

My income is £30,000 so I can borrow £100,000. Annual repayments of capital will be £4000 (this is a crude example) - 13% of my gross income is used to repay capital. If interest rates are 12.5% (that was my first mortgage in the early 1990s) I also pay £12,500 in interest every year so the mortgage costs me £16,500 a year or 55% of my total income. This is almost certainly unaffordable in real life. If interest rates are 4.5% (current rates) the mortgage is only costing me £8,500 a year or 28% of my pay which is affordable.

The point is that simple 3.5x income rules produces totally different results depending on what interest rates are at the time.

Of course you could just leave it to the market - banks could assess what risk they are prepared to take and borrowers could assess what they can afford. Oops we just tried that, banks failed to assess risk properly and most people who post here seem unwilling to accept that the borrower were at fault for taking on loans they could never afford - govt must do something about those poor individuals who got "forced" to take loans on by imprudent lenders ! Sorry but I do not buy this, it is borrower responsibility to make sure you can afford the loans, if you lose your job or get ill make sure you have insurance to cover the problem for long enough until you can get back on your feet - if you make a bit of money pay down the mortgage not blow it on holiday

58 No , financial services, property and construction are our main engine and we have hammered them to near death.... we are never going to be the workshop of the world , but if we can work out how to get our banks big and profitable they can expand again and earn for us.
Let's say it again, the boom is not the problem it is the reflex over-correction that triggers the fall.
Our economy needs to grow at Chinese levels to get back to where it was.
Why do we not just let it happen ? Let's stop ruining it the way we always do.
It's not boom and crash that it is our problem, it is boom ,brake and skid off the road.
Let's get back on the road.
AND WE NEED OUR ACCELERATOR IF WE ARE GOING TO GET ANYWHERE.
There is something suspect about a country where half of the population pay no tax ....let's tax EVERYONE.... NOT JUST HIGH EARNERS.
LET'S PUT higher RATES OF INCOME TAX ON BENEFIT INCOME AND TO DO THIS WE WILL NEED TO INCREASE BENEFITS A BIT , AND LOWER RATES ON EARNED INCOME.
lET'S MAKE IT THAT THE MORE YOU EARN, THE LOWER THE PERCENTAGE YOU PAY IN INCOME TAX SO THAT YOU DO WORK HARDER, AND THAT IT MAKES SENSE TO WORK RATHER THAN TO BE ON BENEFITS.
THE ONLY WAY TO MAKE PUBLIC SPENDING ACCEPTABLE IS TO TAX EVERYONE SO THAT HALF OF THE POPULATION DO NOT HAVE A STAKE IN HIGH PUBLIC SPENDING..
That means cutting CGT, cutting high income tax, cutting stamp duty,and raising VAT .
IT ALSO MEANS SCRAPPING A LOT OF INCOME TAX EXEMPTIONS.
Ok we cannot do it now, but we should do it in order to re-establish the sense that we are all paying our way.
Sure, the Chinese export like crazy, but most of their growth is coming from their finance and construction sectors.
Watch Piers Morgan..... there is a huge amount of dosh in the world.... Let's make Britain a place where people can earn it and spend it again.

Mr Peston

I'm an real estate academic, CBRE Chair in Real Estate Finance at University of Reading. Lord Turner makes a point but his solutions are not fully thought through. LTV ratios in their own right are immensely procyclical but arbitrarily capping them will not help. In practice, LTV's are a function of value - when values rise so the value of investors equity rises. As this rises so the investor gains through the LTV the opportunity to re-lever and then withdraw equity which can then be used to finance another purchase - setting an LTV cap of 80% will not change this dynamic - its an inherent part of the cyclical nature of property investing. In reality values rise because of a whole range of factors that have little or nothing to LTV's - economic activity lifts occupancy and raises rents - this increases values.... a sudden fall interest rates increases spreads between property yields and financing costs this increases values. In practice the pro-cyclicality is enhanced by a dependence on LTV by banks for financing but not on the level of LTV - many banks didn't go above 80% LTV in any case - equity withdrawl that was refinanced over and over again stoked the fall not high LTV's in commercial property.

Second point - most of our major banks assiduously avoided this problem - Lloyds and Barclays did a good job of not over exposing themselves to the commercial property market, Northern Rock's problem was an overreliance on wholesale financing. Of those that were exposed only those that got confused about there position got burnt. HBOS leant both equity and debt to many real estate ventures, they were a train wreck waiting to happen and the market new it, when everyone else pulled back from lending in the summer of 08 they kept coming. Banks that hold both an equity and a debt position in a company or an asset fatally compromise their position and create massive misalignment of interests because of the different risks, returns and optionality. Look at Lehman - it had a massive equity position that fatally compromise it - it was basically a prop trading house for US real estate assets - horribly mismatching its funding sources and use, that had nothing to do with its debt position. RBS had some of this but HBOS dominated the market.... RBS was really sunk by ABN Amro not commercial property positions and both HBOS and RBS have lost masses on the equity position but not nearly as much on the debt positions - many of their loans continue to be serviced without arrears.

LTVs are something of a red herring - they are procyclical and lenders should stop using them as the key covenant in financing agreements but they were not the problem here - the problem was bank executives and regulators failing to spot the inherently conflicted incentives being structured on bank balance sheets by their staff.... Lord Turners comments are ill-judged at this juncture.


Simon Martin

I see people, in this blog and others, wanting to regulate away the buy-to-let market as a potential solution to over inflation / lack of supply in the housing market. This is sometimes disguised as "mortgages-only-for-a-real-home" only arguments and such.

Problem is, where would the rental properties come from ? Landlords have, throughout history, bought their property portfolios by borrowing money. Do we stop "amateur" landlords from operating but ignore the more professional, large scale ones ? Hmm. Perhaps a return of rent controls is one way to discourage the speculators, but that's not going to happen now that rents are so high and lucrative. The so-called free market rules here too.

On the other hand, it seems like the middle-englanders want to pretend that everyone can have their little cottage in the village down the road from the pub with the real-log fireplace and the local farmer delivering fresh produce to the door. Perhaps a reality check may be in order - many people cannot and will never have the income to have their own mortgage (in any sustainable way) and will need to rent. Many live in small rooms and flats in high density urban environments, many are transient populations and live where no sane person would want to buy-to-live for themselves. So back to the original point, rntal properties will also be needed.

By definition all new legislation / rules for financial crimes and reckless practices etc should be applied retrospectively (back to 2000 aka Y2K), as it is absolutely impossible to catch any fraudulent or dodgy transactions in real time mode. It is a shame that such crimes are out of the jurisdiction of police investigations and that the police do not understand the underlying data or complex financial principles etc as the current legislation allows the industry to literally pull the wool over our eyes and fleece and bleed us dry by manipulation and downright abuse of the law.

It would appear to me that Mr Turner is trying to wreck the industry, maybe Mr Turner wants regulating himself

Mr Turner needs to read the Capital Requirements Directive: he already has this power. Methinks he might be a wee bit embarrassed he didn't use it when he had the chance!