The UK government relies on the housing market to boost the economy and on the Bank of England to tame it in case it nears a house prices bubble.
Chancellor George Osborne's most recent bravado of cutting stamp duty tax, without worrying about a house prices bubble, suggest the Bank of England (BoE) is up and ready to act in case of overstretched debt and an unsustainable house price bubble. Also, the chancellor's mantra of sticking to his strict fiscal goals does not make the job of the BoE any easier.
In his Autumn Statement this week, the UK's financial chief Osborne announced, among other things, a cut in stamp duty, a bold move amid concerns the housing market in Britain has been inflated due to various credit-easing schemes and a catastrophic lack of new housing to meet the rising demand.
Although cooling a bit in the most recent months, house prices had been rising sharply in all parts of the UK in the last fifteen months, with prices in London up nearly 20% on the previous year.
Despite this surge, Osborne added more fuel to the fire by announcing less stamp duty. "In recent years the burden of stamp duty has increased on low and middle income families trying to buy a new home, as prices have risen," Osborne said on Wednesday during his Autumn Statement speech. "As a result stamp duty will be cut for the 98% of homebuyers who pay it," he added.
When asked on BBC Radio Four today if he was concerned about the risks to the stability in the UK housing market, Osborne said: "I think the best way to control house prices, and we don’t want to have those big booms in the housing markets,....I think you should not be using unfair punitive taxes that are very badly designed to achieve the goal of having a stable housing market."
Osborne then stressed that "what we should be doing is making sure people can afford the mortgages and giving your central bank, the Bank of England (BoE), the powers to turn off the taps slowly if they feel that the housing boom is developing...."
Osborne's bravado partly stems from the fact the UK is approaching a general election and the government needs a boost. But Osborne's self-esteem is mainly due to his full trust in the BoE and Governor Mark Carney's leadership.
The central bank in London has come through extensive reforms back in 2013 and now has enough failsafe's to determine anytime if anything unsustainable is forming in the economy. Its two main arms, the Monetary and Financial Policy Committees (MPC and FPC), as well as its Prudential Regulation Authority (PRA), have been legislated to do just that.
Regarding the UK housing market, BoE officials have so far introduced two caps on property business. The first one was in November 2013, when the FPC suspended the credit-easing Funding for Lending Scheme (FLS) for house purchases.
The second was in June this year when the BoE introduced a cap on higher loan-to-income ratio loans. The FPC recommended that all major UK high street lenders should not extend more than 15% of their total number of new residential mortgages at the loan-to-income ratio of 4.5 times the borrower's income, or greater. This was introduced in October this year.
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