Think tank calls for 90% mortgage LTV cap
A think tank has called for a 90 per cent cap on mortgage loan-to-values (LTVs) at a maximum of three-and-a-half times household income to combat the UK's "addiction to house price inflation".
The Institute for Public Policy Research (IPPR) has published a report today (31 May) which claims caps on "loose mortgage lending" would help stop another housing bubble in the future.
IPPR's report showed the UK had the highest LTV ratio of any OECD country before the crisis other than the Netherlands and the think tank claims this was one of the main causes of the credit crunch.
The report said the UK's "addiction to house price inflation" was bad for the economy and that a central plank of government economic policy should be to ensure that there is greater stability in house prices.
IPPR's report points the finger at loose mortgage lending as the primary cause of Britain's recent house price boom.
The report argues that although the UK has a long term undersupply of houses, and needs to build more homes at a much higher rate, the availability of cheap credit exacerbated the damaging volatility in the housing market.
The IPPR argued the government and regulators should hold firm against lobbying by the financial services sector, and that the Financial Services Authority (FSA) should recommend LTV and loan to income caps in its current Mortgage Market Review.
The report also argued that deposit requirements on buy-to-let mortgages should be raised and that lenders should ensure that rents cover repayments.
IPPR wants to deter small time speculators from seeking excessive capital gains from the buy-to-let market, since this activity feeds housing bubbles.
The report also calls for tighter control on residential lending from non-banks and says they should only be allowed to operate in the UK mortgage market if they meet comparable reserve requirements to those demanded of banks.
Nick Pearce, director of the IPPR, said: "Britain has suffered four housing bubbles in the last forty years, each of which contributed to major economic and social problems. We must learn the lessons from this economic history.
"The housing minister, Grant Shapps, has tentatively floated the idea of aiming for house price stability but he and George Osborne should go further and make it an explicit policy objective.
"We need tougher mortgage market regulation from the FSA, especially caps on LTV and loan to income ratios."
"The UK has the lowest level of institutional investment in private rented housing in Europe. We should be encouraging institutional investors to build to let while discouraging individual property speculators using buy to let mortgages which can artificially inflate our housing market."