There’s a standard line the Bank of England trots out every time someone asks whether they’re happy about the near-unprecedented regional economic disparities around the UK: they “decide monetary policy for the country as a whole” – not a specific region.
You can trace this regional agnosticism back to a rather unpleasant episode a decade and a half ago when the then Governor, Eddie George, was reported as saying high unemployment in the north was a price worth paying for low inflation in the south of the country. The comments, which he denied making, prompted calls for his resignation.
They also left a permanent scar in the institution’s memory: the Bank would forever be wary of being seen to treat various regions of the country differently. And to ensure it wouldn’t be seen as overly London-centric, it put ever more emphasis on doing regular regional visits. Mervyn King would repeatedly urge journalists to get out of London and see how the economy is really doing around the rest of the UK. This was a sensible PR strategy.
Moreover, the Bank’s remit, which it often cites when it feels it is being asked to do things it would rather not, makes no mention of ensuring a happy balance of economic health across the regions. So, it keeps trotting out that line. Mark Carney has employed it a number of times since becoming Governor, most recently in a marathon Treasury Select Committee session earlier this month. He was asked repeatedly about the gaps between London and the rest – in terms of house prices, business investment and employment – and eventually out it popped: “obviously, as you are well aware, we make policy for the United Kingdom as a whole.” [Q73 here]
But most of us can understand why he’s being asked this question with repeated regularity. The notion of there being major gaps in economic experience between different parts of the country is hardly new: I made a series of pieces about the issue a year and a half ago. Evan Davis recently presented an excellent couple of programmes about the gap between London and elsewhere. It has been the subject of countless columns and analyses. And the gap continues to widen at a worrying rate.
When people see disparities as great as they are at the moment, the first place they naturally turn is to the Government. And this is probably right. But Government is not the only institution which can do something about it. Shouldn’t we be asking, too, whether the Bank of England should be doing more? Ignore, for a moment, that mantra that it only sets policy for the country as a whole.
The Bank’s job is to maintain monetary and financial stability. A key element of monetary policy is prices – primarily consumer prices (stuff you buy every day) but also asset prices (including houses). There is no doubt that the gap in asset prices between different parts of the country has yawned to the greatest level in recent documented history (for instance, hover over the chart below to see property prices in each different region).
The Bank’s second job is financial stability. Now, there’s a lazy assumption that because a chunk of the London property market is accounted for by wealthy cash buyers (eg Russian oligarchs), the sharp rises in London house prices don’t necessarily pose a risk to the financial system. After all, if people aren’t borrowing to pay for those expensive homes, and therefore can’t default and leave a dent in banks’ balance sheets, then there is no risk to financial stability. And therefore the Bank can continue to ignore the regional disparities.
However, common sense and anecdotal evidence suggest otherwise. Just because some high-end buyers don’t take out mortgages doesn’t mean “normal” people won’t have to take out eye-watering mortgages to afford to buy in the capital. And this is borne out in the statistics we have on regional levels of indebtedness (there are a few, mostly curated by the Bank and the FCA). These numbers show that levels of indebtedness vary quite significantly between different regions.
FCA product sales data, produced in the latest Financial Stability Report, and reproduced in my chart above, show that the proportion of new mortgages worth more than four and a half times the buyer’s income is far, far higher in London than elsewhere. In fact, getting on for a fifth of every mortgage taken out in London mid-way through last year was one of these high-gearing loans worth more than four and a half times the buyer’s income.
Of course, as is the case with house prices, London always leads the rest of the country. The issue is that as with house prices in recent months, the gap has widened in indebtedness terms as well. As you can see above, back in 2005 the proportion of “high debt” mortgages in London was about a third higher than the country as a whole. The most recent figures suggest the level in London is now over double that in the rest of the UK.
In other words, there are perfectly legitimate financial stability reasons why the Bank should at the very least be a bit concerned about these regional disparities. Which raises the issue of whether there is anything it can or should do about it. Clearly it can’t set different interest rates for different regions. But the arrival of macroprudential policy provides a genuine opportunity. Given that under this new system the Bank is now able to recommend specific controls on bank lending, there is little stopping it from introducing specific regional controls. It wouldn’t be the first central bank: South Korea has done something similar for years, imposing loan-to-value controls on specific regions to try to counteract local property bubbles.
The real question is whether the Bank is willing to do it. Ever since that Eddie George incident it has been terrified of being perceived treating different areas of the country differently. And if the attitude were different, it’s likely that it would have to have its remit changed to give it a specific responsibility for dealing with these disparities.
Few at Threadneedle have much appetite to open this particular Pandora’s Box. But the fact remains that there are financial stability risks associated with the asset price bubble in London and the South East. These are imbalances Treasury policy can only do so much to moderate. Whether they are big enough to cause a major damage to the wider economy remains to be seen. But if they do, then perhaps eventually the Bank will find itself with little choice but to try to address them.