82Policy Response to Asset and Housing Price

PolicyResponsetoAssetandHousingPriceBoomsandBustsTimBesleyBankofEngland/LSEPaneldiscussionpresentedatthe9thJacquesPolakAnnualResearchConferenceHostedbytheInternationalMonetaryFundWashington,DC─November13-14,2008Theviewsexpressedinthispaperarethoseoftheauthor(s)only,andthepresenceofthem,oroflinkstothem,ontheIMFwebsitedoesnotimplythattheIMF,itsExecutiveBoard,oritsmanagementendorsesorsharestheviewsexpressedinthepaper.99TTHHJJAACCQQUUEESSPPOOLLAAKKAANNNNUUAALLRREESSEEAARRCCHHCCOONNFFEERREENNCCEENNOOVVEEMMBBEERR1133--1144,,22000088PanelDiscussionPolicyResponsetoAssetandHousingPriceBoomsandBustsTimBesleyBankofEngland/LSEIMFNovember2008ThreeIssuesExantepolicyissues.Expostpolicyissues.BackgroundGivenmycomparativeadvantage,IwilldiscusstheseissuesfromaU.K.perspective.Butgiventheglobalissues,thereissomegeneralrelevance.Whatisstrikingaboutcurrenteventsifhowfartheytranscendthespeci…cinstitutionalfeaturesofparticularcountries.HouseholdindebtednessThegrowthofhouseholdindebtednesshasbeenamuch-debatedissueintheU.K.0510152025199719992001200320052007Unsecured(16%)%change3mannualisedTotalSecured(84%)Lendingtoindividuals608010012014016018019871990199319961999200220052008PercentHouseholddebttoincomeHouseholdindebtednessThegrowthofhouseholdindebtednesshasbeenamuch-debatedissueintheU.K.Itwasaccompaniedbysigni…cantincreasesinhouseprices–whicharenowfalling.Source:HalifaxAnnualhousepriceinflation-20-1001020304019871989199119931995199719992001200320052007%changeoyaKeyIssuesWhatarethemarketfailures?Howshouldmonetarypolicyrespondtothesedevelopments?IssueIbehaviouralissuesinunderstandinghouseholdindebteness–whatassumptionsshouldwemakeaboutthelevelofexpertisethathouseholdshave.–howdowethinkaboutdi¤erencesbetweensecuredandunsecurecredit?theliteraturetodateoncreditmarketshasmainlyfocusedoncreditrationingandhowtoreducenothowtoreduceindebtedness.IssueIIOriginateanddistributemodelwasakeyinnovation–thishasimplicationsfor…nancialregulation–buttherearealsoissuesaboutriskpricingandwhethermacroriskisappropriatelypriced.UKRMBSIssuanceMortgagelendingspreads(a)TrackermortgagesspreadoverBankRate;2yr,and5yrfixedratemortgagesspreadoveronemonthlagof2and5yearswaprates-5005010015020025020012002200320042005200620072008SVRBankRateTracker5yrfixed2yrfixedBasispointspreadtofundingrate(a)ExAntePolicyIssuesIsin‡ationtargetingpartoftheproblem?–Afrequentclaimisthatpost2001globalmonetarypolicywastooloose.–Buttherewaslittlesteerfromindicatorsofin‡ation.–butdidlowinterestratesencourageindebtedness?Howshouldin‡ationtargetingcentralbanksrespondtoassetpricedevel-opmentsincludinghouseprices?–thepriceofhousingservicesisnotwellmeasuredinpriceindices–thelinkbetweenhousepricesandthepriceofhousingservicesisnotverydirect.–nominalinterestratesareimportantinmodelswithdownpaymentef-fectsThegrowthofleveragewashoweverfairlyclearandmanyinstitutionswarnedaboutit.–BISandBankofEngland’sownFinancialStabilityreportWhatwastheoptimalpolicyresponse?MyowntakeThisdoesnotunderminethecaseforin‡ationtargeting.ExPostPolicyIssuesFirstorderbusinessistoestablishorderlydeleveraging.Someeconomies(liketheU.K.needtorebalance)Butmajorissueistopreventundershooting–Banksarenowbeingex-tremelycautious.Needtolookatbothpricesandquantitiesofcredit.Monetarypolicye¤ectivenessisimpaired.Evennow,fortheU.K.thecurrent…nancialcrisishaslittletodowithdefaultoftherealsectorontothe…nancialsector00.511.522.5198219851988199119941997200020032006%loansinarrears3-6months6-12months12monthsMortgageRepossessionsSource:CML