Want to know how the property market will pan out over the next few years? Then it’s worth paying more than cursory attention to what the new Bank of England Governor Mark Carney had to say a couple of days ago in Nottingham (you can see the full transcript here).
The Bank, it seems, is trying to do something that has never been attempted in the UK before; keep interest rates low (making mortgages affordable) while keeping a lid on house prices.
In the past, low interest rates have typically been associated with rising house prices.
The boom in prices that ended with the credit crunch really started when the Bank of England base rate fell below 6% in 1999. By the time rates fell to 3.5% in 2003, GSPC calculated that homeowners could borrow twice as much as they could in 1997 for the same monthly payment.
The trouble for the Bank was that, if they raised rates to stop house prices rising too fast, they also put a brake on the rest of the UK economy.
It’s no wonder then that the Bank is keen not to raise rates now or in the near future; the economy needs all the help it can get. When the City expressed doubts that the Bank would keep rates at record lows for perhaps the next three years, Mark Carney took the opportunity of his speech in Nottingham to reiterate the message. Rates, he said, would not go up until ‘jobs and incomes are really growing’.
So, how can the Bank reconcile low interest rates with keeping a lid on property prices?
The answer seems to be new powers that it has acquired to supervise lending to specific sectors of the economy. It could, for example, require lenders to hold more capital when lending to purchase property than for other purposes. Or, it could tell lenders to introduce stricter rules on who qualifies for a mortgage. That might, for example, be a ceiling on the maximum size of a loan relative to income. Both would have the effect of limiting mortgage availability.
So, homeowners can expect mortgage payments to remain affordable for years to come. Moreover, mortgage costs should only rise significantly once their income is rising at the same time.
But the runaway lending to all and sundry that emerged in the last decade will be firmly stamped on. If the Bank does find that it has to introduce new rules on the maximum loan relative to income, it would mean that mortgage borrowing could only increase in step with real incomes. That could potentially tether property price growth to real incomes.
As a famous Chancellor once put it ‘no more boom and bust’.