The Bank of England should use its powers to implement limits on borrowing that could in turn limit house price increases to 5% a year to avoid an artificial housing bubble says the Royal Institution of Chartered Surveyors (Rics).
Rics said that a 5% increase in house prices should trigger caps on how much people are allowed to borrow relative to their income or the value of the property, claiming that this would “take the froth out” of the current housing price boom. They added that they are not suggesting limiting the amount that sellers can charge for their homes.
After a downturn sparked by the financial crisis, the housing market has picked up significantly in recent months, partly due to government schemes such as Help to Buy and Funding for Lending. However, there has been heated debate around whether these schemes are in danger of contributing to an artificial housing price bubble.
With some believing that increases in property prices could reach above 5% this year, Rics have warned the Bank of England to take action. Joshua Miller, Senior Economist at Rics, 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.”
Bank of England governor Mark Carney reassured MPs on Thursday that the Bank is being vigilant, but added that some areas of the country have yet to see any substantial rise in property prices.
Sir Howard Davies, a former deputy governor of the Bank, said that the problem of demand from first time buyers would not be solved by a cap, stating that “the problem is that we are not building enough homes.”