The Bank of England’ should consider limiting house price inflation to 5% a year to prevent another bubble, reckless lending and a dangerous build-up in household debt, the RICS has said.
The Bank's Financial Policy Committee should introduce a specific policy to limit excessive price growth and mortgage lending, which has made the banking sector vulnerable.
The report comes the day after the Bank's governor Mark Carney told MPs that the property market demands "vigilance" and he would take action to prevent prices running out of control.
The RICS said the Bank could restrict annual price rises by introducing caps on LTVs or mortgage durations, or imposing ceilings on the amount banks are permitted to lend.
By sending a clear and simple statement to the public that it will not tolerate house price rises above 5%, the Bank would help restrict excessive price expectations across the country.
This would also discourage households from taking on excessive debt out of fear of missing out on a price boom, and discourage lenders from rushing to relax lending standards as they compete for market share.
Similar schemes have been used in other countries, including Canada between 2008 and 2012, during Mr Carney’s tenure as Bank of Canada Governor. The national regulator gradually reduced the minimum mortgage repayment period and the amount buyers could borrow in relation to their deposit, and imposed more stringent credit checks, easing the pressure on the nation’s market.
Public confidence is central to the success of this strategy and it is vital that any policy is communicated to the public in an open and accessible way, said Joshua Miller, RICS senior economist. "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 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.”
On Thursday, Mr Carney told a Treasury Select Committee that he would consider a potential cap on LTV ratios and more intensive supervision of banks to rein in lending, if the market was judged to be running out of control.
But he said there was little sign of a boom yet, with no meaningful recovery and many pockets of the country.
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