House prices must not be capped, claims leading economist

A PROPOSED cap on house prices would be a "statist" solution which could damage the property sector, according to a leading think tank.

The Institute of Directors was responding to a suggestion from the Royal Institution of Chartered Surveyors' (Rics) that a five per cent annual cap on house prices to halt another period of boom and bust.

Other experts are calling for the Government to ditch the controversial second phase of its Help to Buy stimulus scheme, which aims to help buyers with small deposits, and focus on building more homes in order to meet demand.

Housing charity Shelter says that less than half the number of homes are being built each year than are needed to meet demand.

Graeme Leach, Chief Economist at the Institute of Directors, said: “The Government is already subsidising mortgages in an effort to stimulate demand, and if the Bank of England were to step in and limit house price increases then the state would be pressing the brake and the accelerator at the same time.  

“Policy makers need to recognise that we don’t need more controls on demand, we need fewer controls on supply. 

“The proposal from the RICS is a classic statist solution to a state-created problem. The most effective intervention government can make in the housing market is to liberalise the planning system and make it far, far easier for homes to be built.”

Asking prices for homes in London are 10 per cent higher than they were a year ago. But more recently, there have also been signs that price increases are spreading more widely.

Two-fifths of surveyors across the country recently reported that they are seeing prices rise rather than fall, marking the highest proportion saying this in seven years.

Shelter recently warned that up to 1.8 million middle income families in England earning between £20,000 to £40,000 could find themselves "priced out" of the housing market. It warned that they could either get stuck on the first rung of the property ladder or face years of private renting. 

But Matthew Pointon, a property economist at Capital Economics, said: "The conditions aren't there for a new boom in house prices."

He said that in the short-term, the flood of first-time buyers coming into the market could push up prices as they are raising levels of demand but not supply as they have no house to sell.

But he predicts that this increased demand is likely to fade back after a few months as households are still being squeezed by stagnant wages. 

Ray Boulger, senior technical manager at mortgage adviser John Charcol, added: "We are quite a long way from bubble territory. Although prices in London have been strong for some time, in many parts of the country they are still below their 2007 peak."

House prices in Northern Ireland in particular have seen sharp drops since the economic downturn and have only recently shown signs of stabilising. Prices in Northern Ireland recorded an annual increase in May for the first time in more than five years, according to Office for National Statistics (ONS) figures. 

The Council of Mortgage Lenders (CML) has also played down talk of a bubble as "premature". 

The CML recently said on the "news and views" section of its website: "We are a long way from such conditions and we do not imagine that Bank officials are losing sleep about current developments in the housing market."

It said that despite the recent pick-up in the market, the pace of activity remains moderate following a "long period of sluggishness". express.co.