The Bank of England should limit house price inflation to 5 per cent in order to prevent another financial crisis, a new report has said.
The paper from the Royal Institution of Chartered Surveyors said the bank’s financial policy committee should limit house price growth in order to prevent another house price bubble, reckless bank lending and a dangerous rise in household debt which contributed to the financial crisis.
The RICS said the policy could be implemented through restrictions on lending should house prices exceed a set limit.
These caps could include limits on the amount banks would lend overall or relative to house prices or the incomes of borrowers. It could also include limits on the duration of mortgages.
The paper said a “clear and simple statement to the public” that the Bank would act against price rises above 5 per cent would help prevent house price bubbles by dampening the price expectations of sellers and discouraging buyers from taking on excessive debt for fear of missing out on a boom.
It would also discourage lenders from rushing to relax their lending standards in order to win market share.
RICS said similar policies had been pursued before, including in Canada when the Bank of England’s new governor was in charge of the country’s central bank.
The large housebuilders have enjoyed rises in profits thanks to increased mortgage availability and price growth. But there have been warnings that recent price rises could be the start of another boom.
RICS senior economist Joshua Miller 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.”