In a characteristically combative speech today, Adam Posen, an external member of the Bank of England’s Monetary Policy Committee, asks how best to combat asset price bubbles – and finds interest rates a blunt tool for the job. In many charts, he finds no correlation between interest rates and asset bubbles, and concludes that “trying to manage asset prices – let alone pop bubbles – with monetary policy instruments will not work”.
In many ways, I really like this speech. He refuses to criticise “some commentators” who believe leaning against the wind is the way policy should go, but names names. He uses simple correlations to get his point across, but still references more sophisticated work. He has concrete policy suggestions: “It would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly”.
But there is a serious flaw in Posen’s speech. He clearly spent so long analysing why interest rates are ineffective against housing bubbles, there wasn’t time left to apply the same rigorous analysis to taxation.
While we would expect the value of housing to be related to its tax rate, the exact relationship is about as hard to determine as that between interest rates and house prices. Transfer taxes on UK housing above £500,000 were quadrupled during the UK housing bubble. The Council Tax, a levy based on the value of a house (in 1991), has consistently risen faster than inflation over the past decade. Yet UK house prices have tripled since 1996.
Just like interest rates, tax rises have been quite a blunt tool for stopping a housing bubble this decade.