In the view of this Blog, this answer is both yes and no. It is right to point up the risks of the current boom and right to introduce measures to prevent the problem getting out of hand. But some may say it is out of hand already. Many worry that both the Governor and the Deputy Governor have suggested that the Bank is less concerned with prices and more concerned with debt. Indeed the message is that prices are not its patch, but the debt overhang to fund them is. This does not really work. It is like travelling in a car at excessive speed, concerned only about the potential malfunction of the brakes. Certainly faulty brakes would make the danger excessive, but the problem in the first instance is the speed.
At the heart of the imbalance in the structure of the UK economy is the fact that house prices have become not only excessive, but the molten core fuelling the economy. Because the cost of housing is so high (the average house price should not exceed the range of 2.5-3.0x average income), this sucks away money which would otherwise expand other sectors of the economy. In order to fund these huge costs people borrow, both to buy homes and to fund other purchases for which there is no surplus income left to use. The government has to pay the excess of rent beyond the level which ordinary people can afford. All of this consumes huge resources and contributes to imbalances in wealth, opportunity and employment.
The figures speak for themselves. The government now pays £50 odd billion a year to service the interest on its debt, without a penny of this applied to its reduction. A less well known figure is the the astonishing total of interest being paid on household debt, currently approaching £60 billion a year. This means the economy is having to fund as a first call over £100 billion each year, most of which goes abroad. Worse, government, personal and mortgage borrowing are all on the rise.
When property prices went through a process of correction after the crash, it was incumbent on both the government and the Bank to devise controls which would stop prices rising again faster than inflation. My proposal was for a Mortgage rate, separate to Bank rate, so that it could rise to restrain the housing market, leaving industry and commerce with continued access to cheap money. I put this in my book in 2009. The critical issue was to subject house price inflation to the same discipline as general inflation. Failure to do this is at the heart of our current problem, which should concern the MPC. Tinkering with lending rules now after prices have been allowed to rip in the housing market may avert a catastrophe, but they will not prevent a good deal of difficulty, potentially even a disaster.
Buy my book 2010 A Blueprint for Change You will find the chapter on economics very simple to follow and it puts this whole issue in clear perspective.