Mark Carney is fretting about house prices again.
The former Bank of Canada governor, who left it to his successor to steer his home country out of its property bubble, suddenly finds himself staring at a potentially more dangerous (career-wise, at least) housing conundrum as governor of the Bank of England.
Less than a year into his new job, Mr. Carney is getting decidedly mixed reviews from a much tougher crowd of critics. He's already had one big flub, after he was forced to revise his stated plan to hold interest rates down until the unemployment rate fell below 7 per cent.
The jobless target was achieved two years ahead of Mr. Carney's forecast, with unemployment hitting a five-year low of 6.8 per cent in March, and the latest jobs reports have been among the strongest in years. Still, Mr. Carney insists he won't raise interest rates any time soon, although financial types in the City no longer find his "forward guidance" of much use. They have taken to calling it "fuzzy guidance."
Some even label Mr. Carney a monetary "dove" who's tempting fate. For the first time on his watch, members of the central bank's monetary policy committee disagree over the course of action to take. The governor's insistence that there is still too much slack in the economy to raise rates is challenged from within. His soon-to-leave deputy recently took a jab: "There is a real danger of spurious precision and the pretense of knowledge in this area."
With the Bank of England itself projecting economic growth to top 3 per cent annually for the next three years, and housing prices surging, many fear that Mr. Carney's refusal to begin tightening monetary policy now will only force him to slam on the brakes much harder down the road. That could plunge the economy into recession and leave thousands of homeowners unable to pay their mortgages.
With a long history of "stop-go" growth, British market watchers are increasingly apprehensive.
"Has the UK economy changed so fundamentally that interest rates at a tenth of average levels can be justified?" financial analyst Louise Cooper told The Sunday Times. "Run for the hills … when anyone in the financial world tells you it's different this time. It never is."
Nowhere are the risks as evident as in the housing market. London house prices have risen 17 per cent in the past year alone, and are now 30 per cent above their pre-crash peak. Prices are up 9 per cent nationally since last year and show no signs of cooling. The proportion of home buyers owing more than 4.5 times their annual income on their houses is at scary pre-crisis levels.
Mr. Carney concedes that housing prices are the "biggest risk" to the economic recovery – but apparently not yet a big enough one to raise interest rates. He wants to see more construction to balance supply and demand, noting that Canada, with barely half the population, builds almost twice as many homes annually.
But "we're not going to build a single house at the Bank of England and we can't influence that," Mr. Carney said last week in a thinly veiled message aimed at Prime Minister David Cameron.
He said he could also ask Mr. Cameron to tighten eligibility criteria for the government's signature Help to Buy program, under which the state insures mortgages for first-time buyers who put a 5 per cent down payment on a property worth up to £600,000 ($1.1-million).
Mr. Cameron immediately returned the ball to Mr. Carney's court. "We have actually given to the Bank of England and [its] financial policy committee the tools and the responsibility to call out any problems in our economy, any bubbles in our economy, and act on them," he told the British Broadcasting Corp. "Mark Carney has all those powers at his disposal."
It's clear Mr. Carney's British honeymoon is over. Even his relationship with the government that hired him – and took heat for paying him an eye-popping £874,000 in annual total compensation – is being tested. It could get more strained if the political and economic cycles collide altogether in coming months.
With both a September referendum on Scottish independence and next May's British election on the horizon, any action (or inaction) on Mr. Carney's part could have political consequences. Raising rates or tightening lending criteria might be economically wise, but politically unpopular.
There's one risk Mr. Carney doesn't have to worry about, though. He reportedly chose to spend his £250,000 annual housing allowance on renting, rather buying, a home in unflashy West Hampstead.