‘Bank of England should limit house price inflation’

The Bank of England’s Financial Policy Committee should consider limiting annual house price inflation to 5% to prevent another housing bubble, reckless bank lending and a dangerous build up in household debt, according to controversial RICS research.

With excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed, RICS said. Such a policy could be implemented with caps on elements such as loan-to-value ratios, loan-to-income ratios, and mortgage durations, or imposing ceilings on the amount banks are permitted to lend, should prices exceed a given limit.

Sending a clear and simple statement to the public that the Bank of England will not tolerate house price rises above 5% would help restrict excessive price expectations across the country. This policy would discourage households from taking on excessive debt out of fear of missing out on a price boom, and discourage lenders from rushing to relax their lending standards as they compete for market share.

Schemes such as this have been used in countries such as Canada between 2008 and 2012, during Mark Carney’s tenure as the Bank of Canada Governor. At this time, the national regulator gradually reduced the minimum mortgage repayment period, the amount buyers could potentially borrow in relation to their deposit and imposed more stringent credit checks. It is widely acknowledged that these measures significantly eased the pressure on the nation’s market.

The only difference between what has been done before in other countries and what the Bank of England should implement is that of transparency. Public confidence is central to the success of this strategy and it is vital that any policy is communicated to the public in an open and accessible way.

Joshua Miller, RICS Senior Economist, said: “The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases. Capping price growth at, say, 5%, is one way of doing this.

“This cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt.”

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