It is the fear of falling house prices which are making central banks change course

by Shaun Richards

It was only a few short weeks ago that the headlines were telling us this.

Traders ramped up wagers on the scale of interest-rate hikes by the Bank of England in the short term, to deal with markets in turmoil over the government’s economic plans.
Money markets priced in more than 200 basis points of increases by the BOE’s next meeting in November, four times the size of its last hike. The deposit rate currently stands at 2.25%.

That was Bloomberg on the 26th of September. I will return to the issue of what market prices tell us but at the time there was a warning as those panicking had Piers Morgan on their side.

The Bank of England will now have to urgently jack up interest rates more than necessary to repair damage of pound/dollar collapse carnage. This will worsen inflation. Great work @trussliz@KwasiKwarteng

In that day’s article I suggested a much calmer approach.

So another 1% is in the offing which I would do at the next meeting, and would be willing to do again at the one after if necessary. I say if necessary because I rather suspect things will be different then. So no at an inter meeting hike and no to intervention for now.

I was correct to point out that things were likely to change because look what happened yesterday,

Today, we raised the policy interest rate by 50 basis points to 3.75%.  ( Bank of Canada)

This was quite a change in that 0.75% was expected but not delivered and as regular readers are aware my view is that the Bank of Canada has simply been doing what it expects the US Federal Reserve to do. Of course it came with a lot of rhetoric.

We also expect our policy rate will need to rise further.

But also I note referred to this. I have emphasised a word not entirely randomly.

Third, higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items. But the effects of higher rates will take time to spread through the economy.

It may only be one word at first but later there is much more.

Higher mortgage rates have contributed to a sharp slowing in housing activity from unsustainable levels, and consumer and business spending on goods is moderating. This has led to declines in house prices and is exerting downward pressure on goods prices.

Perhaps they had been reading this.

Before seasonal adjustment, the Teranet–National Bank National Composite House Price IndexTM fell 3.1% from August to September, the largest monthly decline on record since the index began in 1999 and shattering the previous month’s record decline of 2.4%.

After seasonal adjustment, the Teranet–National Bank National Composite House Price IndexTM fell 2.0% from August to September, a monthly drop that equalled the previous month’s record and the fifth consecutive decline.

Although even such falls are merely slowing the annual rate of growth for now.

The Teranet–National Bank National Composite House Price IndexTM, covering eleven CMAs around the country, recorded an annual gain of 6.0% in September, the fifth consecutive month of lower growth than the previous month

If we return to the release from the Bank of Canada they refer to an issue we have noted on several occassions in the past.

Many households have significant debt loads, and higher interest rates add to their burden. We don’t want this transition to be more difficult than it has to be.


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If we avert our gaze from across the Atlantic and instead switch to a land down under I recall this.

The arguments for a 25 basis point increase rested on the risks to global and domestic growth, and the potential for inflation to subside quickly.

That is from the minutes of the Reserve Bank of Australia meeting which were released last week. It did not take too long before they got to the main event.

The full effects of higher interest rates were yet to be felt in mortgage payments and the increases in the cash rate were close to the interest rate buffer applied when many current borrowers took out their loans. The tightening of monetary policy was having a clear effect in the housing market, where prices had declined after earlier large increases, and the demand for housing loans had also fallen.

It is kind of them to also confirm my long standing theme about central bankers being obsessed about wealth effects from housing.

Previous episodes of lower housing prices and turnover had seen a large effect on consumer spending, in part through the wealth channel of transmission.

Of course in this instance we are looking at negative wealth effects the very though of which keeps central bankers awake at night.

Bank of England

Let me now return to my home country and note that according to @financialjuice expectations are now very different.


So 1.25% has gone missing! We can also note that a lot of things have changed with the UK Pound £ above US $1.15 and mentions of UK bond yields have collapsed. If we look internationally the new environment even has the intervention of the Bank of Japan working as it is around 146. Well partly working anyway as it is still above the level at which it first intervened in late September.

My contention is that the recent moves by the Bank of England were all essentially around the mortgage market and house prices and that includes this from the absent-minded professor last week.

If Bank Rate really were to reach 5¼%, given reasonable policy multipliers, the cumulative impact on GDP of the entire hiking cycle would be just under 5% – of which only around one quarter has already come through.

Back, yes you have guessed it to mortgage rates and the housing market or as Yalking Heads put it.

Same as it ever was

Same as it ever was


Today has been on a central theme of my work which is that monetary policy is mostly and sometimes entirely about house prices. Life has changed for central banks in this regard because of the switch in many places from variable-rate mortgages to fixed-rate ones. So when they thought they were being clever with “open mouth operations” that raised interest-rate expectations they are now coming to terms with the fact that from their own perspective it was not clever to ramp mortgage-rates. Hence the change in policy from Canada and Australia.

At this stage we are only getting a reduction in the size of the increases but how long will it take for that to turn into actual cuts in interest-rates?


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