BoE Should Limit House Price Inflation - RICS

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 Royal Institute of Chartered Surveyors (RICS) research launched today.

With excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed. 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. 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.

Joshua Miller, RICS Senior Economist at the RICS, 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, five percent 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."

(CD)