Bank of England director hails shift in property bubble policy
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Version 0 of 1. The prospect of decades of damaging property booms and busts coming to an end has been raised thanks to proactive policymakers and more realistic valuations from the real estate industry, a top Bank of England official has said. Against the backdrop of a crash that left commercial property prices 37% below their peak, Andrew Haldane, executive director for financial stability at the Bank said there were reasons to hope the next cycle could be different. Citing new tools for policymakers, Haldane suggested there had been a "big philosophical shift" from past ways of merely stepping in to "mop up after the flood", such as lowering interest rates. "That orthodoxy has been sunk by the crisis. After perhaps the largest credit boom in human history, central banks globally are still frantically mopping, with unprecedented degrees of monetary stimulus. Yet even that was insufficient to save the world economy from the 'great recession'," he said in remarks to the Bank's commercial property forum, which brings together developers, investors, regulators and other players in the sector. "The lesson from all of this is very clear. As policymakers we must do a much better job of taking prompt corrective action to lean against financial swings which, if allowed to persist, would otherwise put at risk the financial system and wider economy. We need to build defences to protect against the collateral damage from financial flood. We need to be popping, not mopping." Haldane, who is responsible for developing Bank policy on financial stability issues, said there were positive developments to report. "These hold out the prospect – no more than that – that next time could be different," he said. Firstly, he welcomed discussion with the commercial property sector on making valuations more realistic. "Peaky valuations can give the appearance of a safety margin for lenders, causing them to loosen their grip on credit conditions, thus driving valuations higher still … One way of slowing that pro-cyclical spiral would be to base lending decisions not on spot, but on medium-term or sustainable valuations," he said. On the policymaker side, Haldane highlighted the recently created financial policy committee at the Bank. Among its tasks were to smooth out the "stomach-churning highs and lows" in the credit and asset price cycle, which have characterised the past. The committee had already taken such steps, said Haldane, when it recently cut some of the stimulus for mortgage lending. That was against the backdrop of concerns around households' debt burden, relative to income, which at around 140% is almost three times its 1980 level. Just as importantly, the FPC had also "set out its stall on what other macro-prudential measures could be taken to slow the accumulation of credit and debt, if these at some point put the financial system or economy at risk," said Haldane. All in all, those new powers marked an important change, he claimed. He concluded: "While this combination of measures may have appeared modest, they represent a big philosophical shift from the past and an important signal for the future. Regulators, certainly here in the UK, have clearly signposted they are no longer willing to turn a blind eye to pro-cyclical swings in property, or any other sector, which risk tripping up the economy. We can no more eliminate the credit cycle than we can the business cycle. But can we do better than watch on in horror, mop in hand? We can and we must." Our editors' picks for the day's top news and commentary delivered to your inbox each morning. |