At last, central bankers are speaking plainly on property bubbles. The Bundesbank said on Oct. 21 that apartment prices in some German cities could be 20 pct overvalued. Policymakers usually avoid such strident views on asset prices, especially housing, saying that values are not their problem per se; what counts is whether markets are fuelled by excessive borrowing. It would be better if central banks just said exactly what they thought.
The reluctance to be sucked into price commentary is exemplified by Martin Taylor, a member of the Bank of England’s Financial Policy Committee, whose job is basically to prick bubbles. Asked about a proposal that the BoE should take action to cool the property market if house-price inflation hit 5 percent, he said the institution shouldn’t stop prices going up. The FPC’s job was to monitor dangerous leverage.
Taylor is right in the context of his brief. If there is a housing bubble in the UK, it is confined to London and caused largely by the use of homes as a deposit account for domestic and foreign cash. Around half of central London purchases are to unlevered buyers. A market crash would be painful for this group, but would not pose a direct problem for UK banks.
However, there is a problem with this carefully circumscribed approach. Price stability in the housing market is critical for ordinary citizens who are buying a property to live in, with a mortgage funded by income from work. If prices are 20 percent overvalued, say due to a technical surge of safe-haven cash that could one day reverse, that is important information for people making the biggest purchase of their lives. The additional debt that needs to be assumed to do the deal means either more years in work to pay it off, or less disposable income for the duration of the mortgage. That makes a big, lasting difference to the borrower.
The FPC might say that consumers are not obliged to buy property. But in the UK, that requires them to ignore the government’s bizarre offer of state-sponsored leverage.
In practice, there may be limits to what regulators can do to protect consumers from their own justified ignorance of how global financial flows are impacting their lives. But at the very least, policymakers can influence markets by speaking their minds – as the Bundesbank has done.