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An ominous sense of déjà vu

The coalition looks all set to reject the lessons of history and repeat its mistakes. Its plan to impose limits on LTVs to curb unsustainable price rises calls to mind the doomed efforts of Harold Wilson’s Labour government to impose lending controls on the mortgage market

Margaret Thatcher once famously declared that you can’t buck the market. But a new class of young Tory pups like Prime Minister David Cameron and chancellor George Osborne obviously know better than their former PM, or even her successor, John Major, and his chancellor Norman Lamont.

They, if you remember, got their fingers burnt and nearly brought down the economy on Black Wednesday 1992. That was when they splashed out £27bn in a futile bid to shadow the Deutschmark in the European Exchange Rate Mechanism.

Perhaps Cameron and Osborne’s arrogance is due to the possibility that all they know is making them blind to how much there is still to know – a predilection to which we are all vulnerable. Whatever the reason, they are intending to micro-manage the British economy using the new Financial Policy Committee as described in the Financial Services Bill to, among other things, control house prices by setting maximum LTV limits for mortgage lending.

The FPC is being established within the Bank of England to monitor and respond to what is described as systemic risks but what this actually means became abundantly clear during the second reading of the Financial Services Bill, which is the instrument of choice to spawn this monster.

Specifically, financial services secretary Mark Hoban said that the government would be seeking to give the FPC macro-prudential tools to help dampen down a credit boom or to help in a credit crunch.

It will, he declared, be able to alter maximum LTVs to curb an unsustainable rise in house prices. It will also be able to do the reverse, should we face unwanted house price deflation. Moreover, it will potentially be able to alter capital requirements for banks in a counter-cyclical way.

Given the Bank of England’s track record at the onset of the credit crunch – governor Mervyn King was incredibly slow to see the issue as a liquidity crisis – one wonders how the government could be so confident.

Then there’s the performance of the Monetary Policy Committee. It let record low interest rates run on too long after the 9/11 tragedy, fuelling house prices, and has since redefined the meaning of the word temporary when it comes to describing inflation rates that have been well above target since December 2009, in part thanks to its quantitative easing strategy.

But even if Osborne and Hoban have problems in recognising the weaknesses in their own administration, surely they only have to look at how the previous Labour government failed to deliver on the boom-without-bust agenda to realise that you claim to control the markets at your peril.

Brown’s mistake, however, wasn’t in trying to control the markets but in creating a regulatory regime that, like the industry it was tasked to regulate, became too clever by half and came to believe that risk could be reduced to a mathematical formula. As a result it nearly collapsed in its own hubris.

The Tory-led coalition’s conceit is that it believes it can control the housing market – a curiously socialist aspiration which Harold Wilson’s Labour government attempted to put into practice by imposing a monthly lending cap on the industry through its ill-fated Joint Advisory Committee on Mortgages.

It was abandoned in 1979 without having had much of an impact on house prices, though it certainly did nothing to shorten mortgage queues.

At the Lending Zone/HML round table, Paul Smee, director-general of the Council of Mortgage Lenders, referred to the proposed activities of the FPC as part of the regulatory flux to which mortgage lenders are being subjected.

Others present at the discussion weren’t so diplomatic but given the lack of joined-up thinking that has seen political pressure on banks to help small businesses and first-time buyers while the Financial Services Authority has continued to tighten lending criteria, who can be surprised?

Moreover, what is an optimum level of house price inflation and who is party to the decision to influence house prices?

So we’ve got a government that is intent on imposing command economy tactics on a complex market that has been distorted by knee-jerk credit controls, huge subsidies to the rented sector, changing demographics and massive supply side issues.

Then, to cap it all, it has been sheltered from the full wrath of an economic storm by a base rate that has been so low for so long that it beggars belief.

But when is all said and done, is it the housing market that distorts the economy or is it the economy that distorts our housing market?

The latest Lloyds TSB International Global Housing Market Review shows that over the past decade, house prices have typically risen fastest in countries with the most rapidly growing economies.

Overall, gross domestic product has increased on average by 155% in the 10 countries with the biggest rises in house prices since 2001. This is almost four times the average 43% rise in GDP in the 10 countries with the worst house price performance.

But when you compare Germany’s economic performance with Britain’s or Ireland’s, and throw house price performance into the equation, the picture is not so clear. Over the decade, house prices in Britain rose by 50% but in Ireland they have fallen by 23% and in Germany by 17% – and yet look which economy is bankrolling the eurozone.


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