In June 2004, enquiries about homes for sale in the west of Scotland dried up. One estate agent in the west end of Scotland even reported their telephone line as faulty because there were no incoming calls.
What had caused this sharp reversal in activity?
Mostly, a speech by then Bank of England Governor Mervyn King to a CBI dinner in Glasgow. In it, he said that the ratio of house prices to earnings ‘is now at levels which are well above what most people would regard as sustainable’. He warned buyer to ‘consider carefully the possible future paths of both house prices and interest rates.’ You can see the original speech here.
His comments on interest rates carried particular weight because had increased the base rate from 4.25% to 4.5% just days earlier and seemed set to increase them again in the near future. Indeed, the base rate rose to 4.75% in August that year.
That example shows that people really are influenced by the comments of central banks and change their behaviour accordingly, even if the comments seem largely aimed at the City.
That is why the statement on forward guidance made just a few moments by the new Bank of England Governor, Mark Carney matters so much. It provides further reassurance that interest rates are likely to remain low for some time and that will affect the decisions of buyers, lenders and homeowners thinking about re-mortgaging.
Once again, a speech by a Governor of the Bank of England is set to have a direct impact on the property market – without any change in interest rates or Quantative Easing.