Getting the house in order
Britain’s professional home valuers are rightly worried about bubbly residential property prices. Their suggested policy response is ingenious – a requirement that the Bank of England curbs mortgage lending when annual house-price growth exceeds 5 percent. Such a counter-cyclical approach is a good idea, but setting a trigger for intervention is just as misplaced as the government schemes that are currently inflating the market.
The BoE’s Financial Policy Committee already has some power to curb mortgage lending if it thinks a housing bubble may be threatening financial stability. It can force banks to hold more capital against certain types of loan, for example high loan-to-value mortgages. The UK’s Royal Institution of Chartered Surveyors (RICS) wants the BoE to be able to intervene more directly, by dictating actual LTVs or loan-to-income ratios. It also says these powers should be applied automatically if house-price growth hits a certain threshold.
The big advantage of RICS’ idea is that by curbing expectations of turbo-charged housing inflation, it may stop people seeing property as a money making machine instead of a place to live. But having a formal trigger is too blunt. It ignores local differences and would imply prices were basically correct at the time of inception. That’s a brave assumption. UK house prices really went haywire from 2006 and have been pretty topsy-turvy ever since.
Right now, the priority should be ungumming the planning system to boost supply, and removing artificial stimulus in the market. A weak pound, arguably a factor in stimulating foreign purchases in London, now appears to be slowly reversing. The primary culprits nationwide remain the government’s help-to-buy and funding-for-lending schemes. These measures are tantamount to a politically driven policy to guarantee house-price growth. But a policy to curb prices, however well-intentioned, is just as bad.