The Financial Services Authority chairman said that in the future this would mean regulators could control the supply of mortgages in order to control the price of houses, preventing the housing market from overheating.
He said: “The commitment in principle to a macro-prudential approach, operated by the FPC, is a vital step, giving us policy levers to take away the punch bowl before the party gets out of hand.
“Taking away the punch bowl, however, will not always be popular. At various points in the cycle it could mean restricting mortgage credit when individuals are buying houses in a rising market, and limiting credit to real estate investors who enjoy the rising prices which easy credit itself helps produce.”
CREDIT CYCLE
Lord Turner said that the FPC would be “monitoring the credit cycle and the self-reinforcing links between credit extension and asset prices” to identify bubbles before they burst, but added: “The full toolkit to achieve that constraint is still to be defined. It will certainly include countercyclical capital buffers, increased to slow down excessive credit growth, reduced to support lending in recessions.”
Lord Turner acknowledged that the details of controlling asset price bubbles in practice should be the subject of public debate.
He said: “To be effective the FPC will require the independence to make unpopular decisions: but this will only be possible within the context of a public debate which recognises that constraints on easy credit are sometimes in everybody’s best interest.”
The Council of Mortgage Lenders said in a statement that it fully supported a debate about how the future mortgage market would be shaped, saying that the current MMR proposals were “not perfect”.
Robert Sinclair, director of the Association of Mortgage Intermediaries, said limiting mortgage credit to control an asset price bubble assumed that house prices were driven purely by mortgage supply which is not the case.
He said: “Particularly in London there have been indications that more than half of property transactions have been cash based recently.”
And Sinclair also raised the potential problem of creating a “false market” if credit supply is restricted by the authorities.
“In the Mortgage Market Review we’re being told that arrears and repossessions would be significantly higher if interest rates were at normal levels and that therefore the MMR proposals are justified because of the false market that currently prevails,” he said.
“Similarly any attempt to artificially deflate a demand-led bubble will create a similarly false market with the risk that the pent up demand will only surface again later or result in consumers feeling badly dealt with by that market. At some stage that false market will have to be unwound and at that point the consequences will still wash through.”
“USELESS” REGULATION
One lender said the speech was reminiscent of former Prime Minister and Chancellor of the Exchequer, Gordon Brown’s, claim to have ended boom and bust, suggesting that the next credit boom would not be the same as the last - rendering this regulation useless.
Elsewhere in Lord Turner’s speech he discussed the role of the FPC which will be formed when the FSA is dissolved and power given over to the Bank of England, Prudential Regulatory Authority and the Consumer Protection and Markets Authority.
Turner said: “The FPC will fill the crucial gap in our past regulatory structure – the lack of macro-prudential analysis and macro-prudential policy levers.”
But Basildon-based sole broker Danny Lovey was left unimpressed.
“I am not amused as he seems to suggest that the FSA was not asleep on its watch, even though its objectives were maintaining market confidence and protection and enhancement of the stability of the UK financial system,” he said.
STAGGERING NAIVETY
“Turner seems to be saying the FSA was going along with a perception held of 'dominant conventional wisdom' not unique apparently, but common across the world - that all would be well provided free financial markets were left to operate within clearly defined and communicated rules. The naivety of his statement is staggering!
“Even when the FSA was looking at Northern Rock and giving it a clean bill of health the market knew exactly the risks it was taking in regard to off balance sheet / wholesale market funding relative to its retail base.”
And Lovey added: “The FSA chairman is making excuses again for their lack of purposeful supervision.”
