it ’ s not enough that the option to make an irreversible investment project be expected to cover its financial cost – it has to cover the value of waiting, and that value is higher the more uncertain the resulting stream of income. those familiar with such things will recognise chart 4 as the black - scholes formula for pricing financial options ( dixit and pindyck ( 1994 ) ). “ married in haste ”, said congreve, ” we may repent at leisure ”. see park ( 1993 ) for an economic interpretation of this dictum, framed in terms of the option value of waiting. all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx if that seems steep, it chimes with what we often hear on our regular company visits. last year, i went to see a successful sme that was thinking about an acquisition. the firm was in good financial shape – it had very little debt and a fair amount of low - yielding cash on its balance sheet. but it was nonetheless reluctant to make the investment without a prospective rate of return of at least 15 %. this isn ’ t that unusual – i ’ ve heard similar things from several companies. chart 3 : corporate earnings very volatile chart 4 : hurdle rate for irreversible investment rises steeply with uncertainty note : 12 - month rolling window standard deviations of annual growth rates of earnings of all companies currently in the ftse all - share index. source : thomson reuters datastream the importance of uncertainty is also borne out in aggregate data – for investment, overall economic activity and even some aspects of employment. charts 5 - 7 set out some of the relevant numbers for the uk. they all use an index of uncertainty developed by bank economists, based on a range of variables, including media references, options prices and the dispersion of economic forecasts. the composition of this index is standard in the literature. but it ’ s always good to know more. to that end, and in collaboration with h m treasury and a group of academic economists, the bank is setting up new decision maker panel of senior executives from a wide range of british companies. each month the panel members will provide information on how business conditions are changing and, in particular, about the weight they attach to different possible outcomes for investment, sales, employment, costs, prices and margins. in this way we hope to monitor in a timely manner changes

let market closely. for further details, see cunliffe ( 2016 ). see bank of england ( 2016a ). bis central bankers ’ speeches lending to owner - occupiers second, lending to owner - occupiers at high loan - to - income ( lti ) ratios remains significant. the fpc took action in 2014 to counter the risks arising from an increase in the tail of overly - indebted households. its concern was that an increase in the tail of overly - indebted households posed a threat because such households cut back consumption very sharply in a downturn. 5 transactions, house price inflation and the proportion of high lti mortgages all cooled down following the fpc ’ s actions and other factors at the time like the introduction of the mortgage market review. all of these variables have since bounced back. prices and mortgage approvals for house purchase are growing at an annual rate of 7. 5 % and 19 % respectively. 6 and nearly 15 % of new mortgages extended in q4 had lti ratios just below the fpc ’ s threshold of 4. 5 – almost double the proportion in 2008 / 9. commercial real estate the third property - related area the fpc has been looking at closely is commercial real estate ( cre ). many countries have experienced repeated booms and busts in commercial property and the uk is certainly no exception. over the past 100 years, the uk has experienced five cre cycles and similar cycles have been seen in a range of developed economies. at the end of the 1980s cre boom documented by alastair, prices fell by over a third and 25 banks failed or were closed down. 7 and, more recently, 9 % of the uk banks ’ pre - crisis stock of cre lending was written off between 2008 and 2014 compared to 0. 4 % for mortgage lending. over the past two years, commercial property prices have risen strongly by 18 %. up to the second half of last year, the market seemed to be “ simmering ” if not “ bubbling ”. unlike in previous cycles, however, a much greater proportion of cre activity has been financed by equity investors, in large part overseas investors, rather than by uk bank lending. the share of equity finance in uk cre transactions in 2015 is estimated at around 55 %, compared to around 30 % in 2007 and a peak of around 80 % in 2010. so the direct risks to major uk banks from this sector are not