Bank of England should limit house price inflation, says surveyors' body

Research by the Royal Institute of Chartered Surveyors (RICS) proposes cap on price growth

The Bank of England’s Financial Policy Committee should consider limiting annual house price inflation to 5% in order to prevent another housing bubble, reckless bank lending and a dangerous build up in household debt, according to new RICS research launched on Friday 13 September.

RiCs argues that with excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed. The surveyors' group says that 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, RICS argues. 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, it says.

According to RICS, schemes such as this have been used in the likes of 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," said RICS in a statement.

Recent activity in the housing market, suggests it is beginning to pick up after hitting a plateau during the financial crisis, but some have warned of the dangers of another housing bubble.

"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, five percent is one way of doing this." argues Joshua Miller, Senior Economist at RICS.

"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, told MPs on Thursday that the Bank was being vigilant on house prices but stressed that some parts of the country were not witnessing any recovery in the housing market.

Mr Carney has said that he has a "toolkit" to help avoid any damaging housing bubble and enable him to ask banks to set aside more capital for mortgages and to be more cautious in lending to individuals.