People have long freaked out about “fiscal dominance”, the idea that major central banks might submit to serving short-term government policy rather than the longer-term interests of the economy as a whole.
Perhaps they should actually be worried about “mortgage dominance”, which looks far more likely to force central banks into retreat than any angry finance minister.
The UK is a great example. To understand the recent actions and muddled communication of the Bank of England, you need to see it through the prism of mortgages and the precarious state of the UK housing market. The BoE’s wants to tighten policy and sound tough on inflation, but not so tough that mortgage rates go up any more than they have to.
Chris Marsh at Exante and Jim Reid at Deutsche Bank have both noted how this looks like mortgage interests de facto dictating policy to some central banks. Here’s a snippet from a note Reid sent out on Tuesday:
Last week the Bank of England seemed very nervous about house prices and there was some sense that rather than being in an era of fiscal dominance we might actually be in an era of mortgage dominance. Will extremely high global house prices and the risk that their fall could destabilise economies eventually influence other central banks like the Fed and ultimately loosen their commitment to the inflation fight? It’s going to be an interesting couple of years ahead for global housing.
It’s not just the UK either. The central bank of Norway — an under-appreciated global powerhouse, according to one subjective FTAV writer — last week slowed down its pace of rate increases and said it would soon pause the tightening cycle, partly due to worries over real estate.
Here’s what Norges Bank governor Ida Wolden Bache told Reuters last week:
We do see clear signs of a cooling off on the housing market, and we had expected that the housing prices would decline and now it looks like the drop in September and October has been a bit bigger than what we based our latest monetary policy report on.
Even the Bank of Canada — which for a period looked like it was almost showing off in its zeal to raise interest rates — is now saying it might soon take a bit of a break. On a not-unrelated note, RBC has warned that the BoC’s already “massive” interest rate increases would deepen a property market sell-off, which could reach 14 per cent by next year.
Dylan Grice at Calderwood Capital thinks this is too optimistic. In the investment firm’s most recent report he wrote that “Canada is a textbook housing bubble, and it is bursting. it will have a painful and consequential fallout.”
The issue with “mortgage dominance” goes far beyond the fact that a big chunk of any major economy’s debts will be in mortgages, and that property crashes are economically very painful (the humble home loan has destroyed many more financial systems than any derivative).
Mortgage holders tend to be wealthier, and tend to vote. Mortgage rates are therefore uniquely politically sensitive, in a way that other forms of debt are not. Normies don’t actually care what 10-year government bond yields do; they do care about the cost of their mortgage.
Idiosyncrasies of mortgage debt help explain why some central banks are now slowing their pace of tightening, while others are still going for it.
While Norwegians overwhelmingly borrow in floating rate mortgages, and Brits usually only lock in rates for a few years (if they do at all), Americans are more protected financially by the dominance of their fixed 30-year mortgages.
That means that the massive jump in mortgage rates — from about 3 per cent at the start of the year to an average over 7 per cent at pixel time — will take a bit of time to filter in. It also implies that the Fed is going to be able to keep jacking up rates, in spite of the ever-growing list of central banks to blanch and hit the pause button.
That said, as DB’s Reid points out, the affordability of US housing has taken a big hit lately with the rise in mortgage costs.
Source: Economy - ft.com
