Busting the Boom Myths
Credit boom? An estate agent's sign in Stoke-on-Trent, location of some of the lowest house prices in the UK
Spotting boom-bust cycles in advance is the Holy Grail of macroeconomics. If someone can predict the main features of a big cyclical upheaval a year or two before they happen, he or she can set up a consultancy business, and thereafter enjoy an easy life of pontification and punditry. However, supply and demand operate in the market for boom-bust cycles, as in all markets. The inevitable result of the profitability of boom-bust forecasting is that far more boom-bust cycles are forecast than actually occur.
At present a great fuss is being created about the rise in house prices. Various so-called experts have warned of similarities to previous episodes of cyclical turmoil and even used the inflammatory phrase "credit boom" to characterise the emerging problem. In a recent interview for Sky News the Governor of the Bank of England, Mark Carney, suggested that "the biggest risks to financial stability, and therefore to the durability of the expansion, centre in the housing market".
The Bank's officials are monitoring loan-to-value ratios in mortgage lending, because they want excessive risk to be kept off balance sheets. Just as the media claim, it is the danger of too much debt that worries them. But is Britain in the midst of, or even on the threshold of, a "credit boom"? Detailed statistics on housing finance have been maintained for more than 50 years, and it is an easy matter to compare the situation today with that in the two undoubted boom-bust cycles of the early Seventies and late Eighties.
In the first of these we can focus on the building societies, as they dominated housing finance at the time. In the three years to the end of 1973, a period which saw an astonishing surge in house prices, their mortgage assets climbed from £8.8 billion to £14.6 billion, implying a compound annual rate of increase of 18.4 per cent.
By the Eighties banks had also become active in mortgage lending, so that the Bank of England began to prepare a series of "loans for house purchase" which included building societies, banks and miscellaneous other lending institutions. At the end of 1989 such loans totalled £255.9 billion, up from £154.3 billion at end of 1986, with a compound annual growth rate again of 18.4 per cent.
As a rough generalisation, we can think of credit as "booming" in a year when the stock of debt rises by more than 15 per cent. In retrospect, it does indeed seem incredible that top policy makers could allow such a rapid pace of credit expansion with little or no obvious concern. Even more extraordinary is that the excesses were recorded when the reputedly sound-finance Conservatives were in power. The most recent boom-bust cycle, under Labour, was more muted in its boom phase, although the bust was a horror. At any rate, in the three years to the end of 2007 the stock of debt secured on residential property went up from £877.5 billion to £1,187.2 billion, or by 10.6 per cent a year.
So — if we are to start ringing alarm bells about a housing credit boom — we should watch out for annual rate of increase into the double digits and, for certainty, into the high double digits.
What do the latest numbers show? Yes, the British public has been borrowing more than it has been repaying. Yes, net mortgage debt has increased in the last few years, despite the wider strains in the economy. But no, reports of a boom are unjustified and wrong.
The stock of the personal sector's secured debt at the end of March this year was £1,280.1 billion, up by just over 3.3 per cent from £1,238.9 billion in March 2011. UK mortgage debt, in this period of alleged credit abandon, had gone up by a mere 1.1 per cent a year.
Pace Mark Twain, the truth should never get in the way of a good story. No doubt much of journalism is a guerrilla campaign between fact and fantasy, and perhaps editors should not be blamed if they meet readers' demand for boom-bust scaremongering. But policy makers must try harder. They need to look beyond tomorrow's headlines, and really should pay attention to official statistics, rather than media hype.
The data are clear. The UK is not suffering from a credit boom at all. An obvious persisting theme of the British financial scene is that banks remain under the cosh of tightening regulation.
For more than five years now, since the regulatory assault on their businesses which followed the Lehman fiasco in September 2008, they have had to restrict the growth of their balance sheets in order to comply with official demands that they hold more capital and limit their risks. Of course interest rates will have to rise eventually but, while credit is flat and money growth low, there is no hurry.