13 Sep 2013

Cap house prices to rein in lending, say surveyors

A 5 per cent cap on house price growth may be needed to prevent an inflationary boom and bust, according to the Royal Institution of Chartered Surveyors.

A 5 per cent cap on house price growth may be needed to prevent an inflationary boom and bust, according to the Royal Institution of Chartered Surveyors (Getty)

A Rics report says the Bank of England’s remit needs to be changed to allow it to put a cap on rises in property to take the “froth” out of any future booms and put a stop to any “dangerous build up in household debt”.

This would mean restrictions on what banks and building societies can lend and the duration of loans.

With interest rates at record lows and the housing market picking up as the economy recovers, there are fears that a property price “bubble” could emerge and later burst.

Surveys carried out by Rics show that estate egencies expect prices to rise by 4.4 per cent a year over the next five years, with prices in London increasing by 8.2 per cent a year over that period.

Recent figures from Halifax show that house prices are 5.4 per cent higher than last summer.

The report, written by Rics economist Joshua Miller, says the Bank of England’s financial policy committee (FPC) should be able to send out a clear message that it will not tolerate house price rises above a certain limit.

Mr Miller told Channel 4 News his proposed change was not in the FPC’s current mandate and “would have to get signed off” by the government before it was implemented.


He added: “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.”

House price inflation in Britain is usually driven by London and the south east, and although a cap might be deemed appropriate in this part of the country, it might not be elsewhere.

As a solution, the report says that while the 5 per cent cap would cover the entire country, there could be more draconian limits on lending in parts of Britain that were over-heating.


It also acknowledges that there could be risks involved in setting a cap, with a danger that housing shortages could be exacerbated and the prospect that people on low incomes and first-time buyers could be adversely affected.

Caps were used in Canada, when new Bank of England Governor Mark Carney was in charge of the country’s central bank.

Since taking over at Threadneedle Street this summer, Mr Carney has issued “forward guidance” on interest rates, saying base rate is unlikely to rise until 2016.

The current base rate of 0.5 per cent is helping to keep mortgage rates low, while the government’s funding for lending and help to buy schemes have widened the availability of loans.

Mr Carney has said he is “acutely aware” of the dangers of over-heating and action could be taken to clamp down on mortgage lending if needed.

The Council of Mortgage Lenders recently said that talk of a housing boom was “premature”.

It believes that while the housing and mortgage markets are showing “some initial signs of recovery this summer”, current house sales are still at lower levels than they were when the UK was recovering from a downturn in the early 1990s.