FEB 2015 – Boys and their Toys

The responses to the financial crisis and the conclusion that the regulatory structures had failed, meant that politicians had to be seen to do something. Part of the solution was to introduce the Financial Policy Committee that has been given a range of tools to ensure that in addition to the Monetary Policy Committee controlling price inflation, there is a committee looking at other facets of the economy to ensure stability and sustainability. Of major concern to the FPC is the damage done by property price inflation. However it must be said that if you install a group of heavyweights such as this committee, they will always see the need to intervene. There is less risk to them in acting and getting it wrong than crisis re-emerging without activity.

In asking for and been given powers on Loan to Income, Loan to Value, and possibly on Debt to Income, having been given the toys the will be impelled to play with them. The big concern is that these are blunt instruments that limit individuals affordable ability to borrow, limits their legitimate choice, and risks damaging the recovery in the broader economy fuelled by the governments interventions in housing. But there is little doubt that Barclays recent actions risks narrowing borrowing options further as other lenders may have to follow. With house price inflation evaporating in the UK the challenge is whether this group is fleet of foot enough not to damage the sustainability by causing decline rather than controlling damaging house price growth.