Call for Bank of England to cap house price rises

Joshua Miller, senior economist at Rics, said that it would enable the Bank of England (BoE) to “take the froth out of future housing market booms” and reduce the risk of a bubble.

But analysts have questioned how such an aim could be achieved in practice. Rics proposes that if the average house price rose by 5 per cent, a cap should come into place on how much borrowers could be loaned in relation to their incomes or the cost of the property.

It would not, however, affect how much individuals could put their home on the market for. It would instead discourage borrowers from taking out mortgages they cannot afford in order to take advantage of a supposed price boom.

Article continues after advert

The suggestion responds to fears that government-backed schemes such as Help to Buy are creating a price bubble, driving demand for homes by enabling people to afford them while there are not enough properties to balance out the growing demand.

The Council of Mortgage Lenders (CML) said gross mortgage lending in June 2013 was up 29 per cent on June 2012, while interest rates charged on mortgages are falling.

BoE governor Mark Carney referred in August to a “toolkit” to restrict mortgage credit, including the possibility of raising the amount of cash that banks must hold to offer home loans, demanding first-time buyers put down larger deposits or imposing harsher repayment terms.

Whether or not it would even be possible to implement a cap is another matter. If the BoE has struggled to keep inflation at 2 per cent, there is little hope for it to be able to limit annual house prices growth to 5 per cent. However, a similar scheme was implemented between 2008 and 2012 under Mark Carney’s tenure as governor of the Bank of Canada, which is acknowledged to have alleviated pressure on the property market.