Growth in house prices should be limited to 5 per cent a year, says a new report from the Royal Institute of Chartered Surveyors (RICS).
This would prevent another housing bubble, reckless bank lending and a dangerous build up in household debt, according to the new research.
The report argues that past history of excessive house price growth and high mortgage lending has led to a vulnerable banking sector, and therefore specific policy on limiting house price growth is needed.
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.
RICS says that by capping house price inflation to 5 per cent 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 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.
RICS says it is widely acknowledged that these measures significantly eased the pressure on Canada’s housing market.
Joshua Miller, RICS senior economist and author of the report, 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 per cent 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.”
