The Bank of England's Financial Policy Committee should consider limiting annual house price inflation to 5% in order to prevent another housing bubble, it is claimed.
With excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed, according to research from the Royal Institution of Chartered Surveyors (RICS).
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.
RICS says that 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.
It claims that 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.
Schemes such as this have been used in places such as 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, RICS points out.
It adds that 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.
'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,' said Joshua Miller, RICS senior economist.
'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,' he added.
Reaction to the proposal is mixed. James Moss, managing director of Curzon Investment Property, said while concerns should be raised about a new potential housing bubble the emerging problem is currently only in London and across the UK the housing market recovery is still patchy.
'The main driver for the forthcoming "property boom" is central government policy. The Bank of England already has many options available to control bank lending, as stated by Mark Carney, without having to resort to arbitrarily capping house price growth. This includes the Help To Buy scheme, which will be opened up across the entire UK housing market in only three months' time,' he explained.
Stuart Law, chief executive officer of Assetz, is against the idea of artificially controlling prices and called the RICS proposal 'outrageous'. 'No one wants to see house prices rising at outlandish levels, but artificial price controls always end in tears, and are not the way to approach this issue. A cap on property price increases would lead to a corresponding cap in developers building more homes for our rapidly growing population due to the suppression in demand,' he pointed out.
'This is a simple question of supply. The best way to temper rising prices is by building more homes and placing a temporary block on NIMBYism. A useful mechanism would be to compel local authorities to pre-zone and compulsory purchase green field and green belt land which is then automatically released for building homes in areas where property prices are exceeding, say, 5% annual increases.
'Farm land is cheap and if accompanied by substantial Section 106 affordable housing requirements would improve supply and help reduce price growth. This is an extension of the recent positive step to force local authorities to identify brown field land which could receive planning quickly and efficiently,' he explained.
'RICS is effectively asking for market prices to be manipulated, and thereby falsify the property market. This is outrageous and a poor economic solution to a simple supply demand problem. Let's build more,' he added.
Sue Foxley, head of research at Cluttons, also believes that what is needed is more homes rather than price controls. 'An introductory "speed bump" to the property market would temper the housing market and perhaps avoid the volatility seen in the past, but there is a social cost of such a policy in terms of setting the hurdle even higher for households who are in housing need,' she said.
'The Bank of England only controls one side of the equation and what we really need are more homes. As schemes such as Help to Buy take effect in helping home buyers get that first important step on the run, the absence of the intervention on the supply side will result in prices rising well ahead of earnings especially in London and the south east,' she explained.
'We, of course, openly welcome initiatives from lenders who are enabling home buyers who have been unable to move on with their lives effectively since the Lehmans collapse exactly five year ago. However, while the Bank of England and Government can put in place such measures centrally to support buyers, supply has fallen evermore into the hands of local communities who inevitably and understandably do not have responsibility or regard for a national housing crisis,' she added.
Others were more critical. Michael Fiddes, head of agency at Strutt & Parker, said he is concerned that RICS has shown a lack of understanding of the housing market. 'The surprise announcement by RICS, suggesting a cap on house price growth as a way of tackling economic risk taking and debts, is a facile one,' he said.
'It is important to realise there is not a uniform property market in the UK. To understand the market, it is imperative to consider all sectors and all geographical areas, and London and the South East have seen rises greater than the rest of the UK. Although there is talk of a price bubble, which I believe is hyperbole anyway, it doesn't feel like that across all areas of the UK, he explained.
'The London market, which has seen the greatest price surge, has lots of cash buyers and the RICS policy suggestions do not affect these types of purchasers. Trying to limit areas that are seeing the highest price growth means other regions may suffer as a result.'If you try to cap house loan to income ratios, an instrument that RICS is suggesting, all you're doing is distorting the natural movements of the market. I don't believe that trying to influence the basic laws of supply and demand is the right way of tackling the problem,' he added.
Fiddes also believes that if a bubble is being created, one of the main causes is the government's Help to Buy scheme. 'What we need to do is see a stable market where housing is affordable and if we can get the supply and demand levels correct, then a free market will find its own level. It feels like RICS is proposing a remedy to the Help to Buy, but you cannot cure a wrong with another wrong,' he pointed out.
Peter Young, managing director of John D Wood & Co, branded the proposal 'ridiculous' and said that the free market always dictates the correct price paid, whether property, consumer goods or a service.
'When governments interfere in a free market economy they can never plan for the unintended consequences of their actions. For example the hike in Stamp Duty Land Tax (SDLT) to 7% for property sales over £2 million has increased the demand and value for So anyone trying to trade up from say a £1.5 million property to a £3 million property, in addition to repaying their initial loan and finding a further £1.5 milion they will also have to find and extra £300,000 to pay for the SDLT at £210,000 plus solicitor's and agent's fees and the cost of moving itself. This is circa 10% of the onward purchase price all for an extra bedroom or two,' he explained.
'As a result those living in property under £2 million are frequently better off putting the £300,000 towards digging out a basement or building on top or at the side or back of their existing property, thereby depriving HM Customs and Excise of much needed revenue and irritating their neighbours. Less is frequently more.
'Secondly how would it be possible for the Bank of England to control the UK property market? The property market, like any other is controlled by supply and demand. If enough people want something, and they are willing to pay more, then they will,' he pointed out, adding that the firm is seeing multiple sealed bids for properties in prime areas of London.
'How will the Bank of England control cash buyers? In the prime central London property market cash is king however it makes financial sense to take out a loan with the current low interest rates. Indeed, for once, even estate agents are concerned about the pace of rising prices forcing people to stay in their homes and extend if possible. The traditional property market, where you sell a smaller property to trade up to a bigger one using your pay rises to fund a larger mortgage and continuing to rise up the ladder until you reach a large family home has changed because the steps are now too costly. Incomes are not going up at the same rate as house prices,' said Young.
'If the government really wanted to control values and bring down house prices then they need to make it cheaper not more expensive to move. They would also substantially increase their revenue, by helping unlock the market. However that won't impact on overseas investors wanting a safe haven for their cash,' he added.
Nicholas Leeming, chairman elect of national estate agents Jackson-Stops & Staff, warned that restrictions could be detrimental to the market in parts of the country still waiting to experience the 'froth' highlighted by RICS.
'While there are some signs of greater activity in the UK housing market, this is not reflected across all sectors. We do not believe that there is any set formula to be followed in controlling the housing cycle, but the Bank of England will obviously consider whether higher interest rates, restricting credit availability or other controls are required if there is clear evidence that the overall market is overheating in the future,' he added. propertywire
With excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed, according to research from the Royal Institution of Chartered Surveyors (RICS).
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.
RICS says that 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.
It claims that 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.
Schemes such as this have been used in places such as 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, RICS points out.
It adds that 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.
'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,' said Joshua Miller, RICS senior economist.
'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,' he added.
Reaction to the proposal is mixed. James Moss, managing director of Curzon Investment Property, said while concerns should be raised about a new potential housing bubble the emerging problem is currently only in London and across the UK the housing market recovery is still patchy.
'The main driver for the forthcoming "property boom" is central government policy. The Bank of England already has many options available to control bank lending, as stated by Mark Carney, without having to resort to arbitrarily capping house price growth. This includes the Help To Buy scheme, which will be opened up across the entire UK housing market in only three months' time,' he explained.
Stuart Law, chief executive officer of Assetz, is against the idea of artificially controlling prices and called the RICS proposal 'outrageous'. 'No one wants to see house prices rising at outlandish levels, but artificial price controls always end in tears, and are not the way to approach this issue. A cap on property price increases would lead to a corresponding cap in developers building more homes for our rapidly growing population due to the suppression in demand,' he pointed out.
'This is a simple question of supply. The best way to temper rising prices is by building more homes and placing a temporary block on NIMBYism. A useful mechanism would be to compel local authorities to pre-zone and compulsory purchase green field and green belt land which is then automatically released for building homes in areas where property prices are exceeding, say, 5% annual increases.
'Farm land is cheap and if accompanied by substantial Section 106 affordable housing requirements would improve supply and help reduce price growth. This is an extension of the recent positive step to force local authorities to identify brown field land which could receive planning quickly and efficiently,' he explained.
'RICS is effectively asking for market prices to be manipulated, and thereby falsify the property market. This is outrageous and a poor economic solution to a simple supply demand problem. Let's build more,' he added.
Sue Foxley, head of research at Cluttons, also believes that what is needed is more homes rather than price controls. 'An introductory "speed bump" to the property market would temper the housing market and perhaps avoid the volatility seen in the past, but there is a social cost of such a policy in terms of setting the hurdle even higher for households who are in housing need,' she said.
'The Bank of England only controls one side of the equation and what we really need are more homes. As schemes such as Help to Buy take effect in helping home buyers get that first important step on the run, the absence of the intervention on the supply side will result in prices rising well ahead of earnings especially in London and the south east,' she explained.
'We, of course, openly welcome initiatives from lenders who are enabling home buyers who have been unable to move on with their lives effectively since the Lehmans collapse exactly five year ago. However, while the Bank of England and Government can put in place such measures centrally to support buyers, supply has fallen evermore into the hands of local communities who inevitably and understandably do not have responsibility or regard for a national housing crisis,' she added.
Others were more critical. Michael Fiddes, head of agency at Strutt & Parker, said he is concerned that RICS has shown a lack of understanding of the housing market. 'The surprise announcement by RICS, suggesting a cap on house price growth as a way of tackling economic risk taking and debts, is a facile one,' he said.
'It is important to realise there is not a uniform property market in the UK. To understand the market, it is imperative to consider all sectors and all geographical areas, and London and the South East have seen rises greater than the rest of the UK. Although there is talk of a price bubble, which I believe is hyperbole anyway, it doesn't feel like that across all areas of the UK, he explained.
'The London market, which has seen the greatest price surge, has lots of cash buyers and the RICS policy suggestions do not affect these types of purchasers. Trying to limit areas that are seeing the highest price growth means other regions may suffer as a result.'If you try to cap house loan to income ratios, an instrument that RICS is suggesting, all you're doing is distorting the natural movements of the market. I don't believe that trying to influence the basic laws of supply and demand is the right way of tackling the problem,' he added.
Fiddes also believes that if a bubble is being created, one of the main causes is the government's Help to Buy scheme. 'What we need to do is see a stable market where housing is affordable and if we can get the supply and demand levels correct, then a free market will find its own level. It feels like RICS is proposing a remedy to the Help to Buy, but you cannot cure a wrong with another wrong,' he pointed out.
Peter Young, managing director of John D Wood & Co, branded the proposal 'ridiculous' and said that the free market always dictates the correct price paid, whether property, consumer goods or a service.
'When governments interfere in a free market economy they can never plan for the unintended consequences of their actions. For example the hike in Stamp Duty Land Tax (SDLT) to 7% for property sales over £2 million has increased the demand and value for So anyone trying to trade up from say a £1.5 million property to a £3 million property, in addition to repaying their initial loan and finding a further £1.5 milion they will also have to find and extra £300,000 to pay for the SDLT at £210,000 plus solicitor's and agent's fees and the cost of moving itself. This is circa 10% of the onward purchase price all for an extra bedroom or two,' he explained.
'As a result those living in property under £2 million are frequently better off putting the £300,000 towards digging out a basement or building on top or at the side or back of their existing property, thereby depriving HM Customs and Excise of much needed revenue and irritating their neighbours. Less is frequently more.
'Secondly how would it be possible for the Bank of England to control the UK property market? The property market, like any other is controlled by supply and demand. If enough people want something, and they are willing to pay more, then they will,' he pointed out, adding that the firm is seeing multiple sealed bids for properties in prime areas of London.
'How will the Bank of England control cash buyers? In the prime central London property market cash is king however it makes financial sense to take out a loan with the current low interest rates. Indeed, for once, even estate agents are concerned about the pace of rising prices forcing people to stay in their homes and extend if possible. The traditional property market, where you sell a smaller property to trade up to a bigger one using your pay rises to fund a larger mortgage and continuing to rise up the ladder until you reach a large family home has changed because the steps are now too costly. Incomes are not going up at the same rate as house prices,' said Young.
'If the government really wanted to control values and bring down house prices then they need to make it cheaper not more expensive to move. They would also substantially increase their revenue, by helping unlock the market. However that won't impact on overseas investors wanting a safe haven for their cash,' he added.
Nicholas Leeming, chairman elect of national estate agents Jackson-Stops & Staff, warned that restrictions could be detrimental to the market in parts of the country still waiting to experience the 'froth' highlighted by RICS.
'While there are some signs of greater activity in the UK housing market, this is not reflected across all sectors. We do not believe that there is any set formula to be followed in controlling the housing cycle, but the Bank of England will obviously consider whether higher interest rates, restricting credit availability or other controls are required if there is clear evidence that the overall market is overheating in the future,' he added. propertywire
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