No matter how Governor Mark Carney dresses it up, the Bank of England's decision today to impose caps on mortgage lending amounts to an explicit effort by the central bank to manage asset prices. It's also a reminder that while U.K. house prices are surging, the flip side of the affordability calculation -- wage growth -- is the real problem.
At the risk of getting all Piketty, labor has no pricing power. Carney's predecessor, Mervyn King, at briefing after briefing warned that wage inflation was just around the corner. It wasn't. There's still no sign that British employees feel sufficiently confident about the jobs market to demand better pay, or that employers are worried enough about a talent shortage to boost salaries.
Here's a chart comparing wages and inflation in the past decade:
Wages haven't kept pace with inflation, apart from the false dawn highlighted on the chart. Earlier this week, during a grilling from lawmakers at Parliament’s Treasury Committee in London, Carney said that wage data has been "softer than our expectations”," but that "our expectation is for an acceleration in wages in the second half." Today, he said: "We don't target house prices, we care about indebtedness. We think that price dynamics in the housing market are going to slow in about a year as incomes pick up."
There was also a half-buried message in today's press conference about the central bank's reluctance to raise interest rates for fear of missing its target of getting inflation back up to an annual pace of 2 percent. By imposing restrictions on lenders, "monetary policy does not need to be diverted to address a sector-specific risk in the housing market," Carney said. In other words, if Carney can cool the housing market with tighter controls on mortgages, he can keep rates lower for longer.
Carney said the measures introduced today, such as forbidding lenders from making more than 15 percent of their new loans to customers seeking to borrow up to 4.5 times their income, are designed to "prevent lending getting too far ahead of income growth." It strikes me that an improvement in the income-growth side of the balance would be a superior way to achieve that.
Here's a scenario for the rest of this year and the start of 2015. Wages stay stagnant. The government's preferred measure of inflation remains quiescent. House prices head higher. And the Bank of England, unable to raise interest rates, finds itself having to intervene again and again in the housing market. Rearrange the words "creep" and "mission" to form a well-known military phrase describing how operations tend to drift beyond their initial objectives.
I'm convinced that central bankers, with their budding love of so-called macroprudential strategies to steer the economy, will veer uncontrollably into what I'm calling "Ouija Economics" -- a phrase I hope to copyright before Pimco adopts it to replace the "New Neutral."
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