Given the performance of UK house prices over the past five years, a price ‘boom’ is probably the last thing on most of our minds.
The Royal Institution of Chartered Surveyors (Rics) is however concerned and has called on the Bank of England to take steps to curb excessive house price growth.
They want the Bank to use its powers to “take the froth out” of any house price booms and limit these to around 5% a year.
The Rics proposal suggests that the Bank would trigger mortgage lending restrictions when house prices grew by 5% or more in a year, stopping short of a suggestion that sellers should face a limit on sale prices.
Joshua Miller, senior economist at 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, 5% 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.”
An unsustainable rise in debt levels is clearly a bad thing, both for individual borrowers and the economy as a whole.
Debt is important when buying property, as without access to affordable mortgages, most of us would struggle to ever own a home.
Where debt goes badly wrong in terms of property purchases is where interest rates rise, repayments become unaffordable or circumstances change so the income is no longer available to keep up repayments.
The commonly seen risk warning which accompanies mortgage lending is there for a reason; you could lose your home if you cannot afford to keep up your repayments.
It’s worth noting that the global financial crisis, which started five years ago, was less about reckless mortgage lending and more about how mortgage debt was then packaged as an investment for others.
With the Bank of England consistently failing to meet their 2% target for inflation as measured by the Consumer Price Index (CPI), imposing another important economic target of maximum 5% house price growth could get very messy indeed.
