Rising house prices are a problem. Stopping renters buying, giving people a belief they have more money than they actually do and fuelling debt-based spending sprees.
Worse, a period of soaring house prices has directly preceded financial collapses time and time again in countries across the world.
So what if we could just stop them?
According to a new report by the Institute for Public Policy Research it’s not only possible, but the Bank of England already has the power to do it.
All that would be needed is a small tweak in its remit from the Government.
“The Bank of England should be given a target to control house price inflation,” the IPPR’s latest report – On Borrowed Time: Finance and the UK’s current account deficit – states.
“Under such a target the Bank of England should aim to keep nominal house price inflation at (say) 0% for an initial period – perhaps 5 years – to reset expectations, and allow affordability to improve.
“It should then be increased to the same rate as the consumer price inflation target of 2% per year, meaning zero real-terms house price growth.”
Why it matters
Since 1979, house prices in the UK have increased tenfold. That’s twice the increase of prices in general.
This change has had two effects on the economy. Homeowners are now, relatively, richer than they were 40 years ago, and they’ve also found it easier to get into debt – borrowing cheaply against the increased value of their homes.
But it’s not just borrowing against houses that has risen.
“There is a clear correlation, not only between mortgage debt and house prices, but also between consumer credit and house prices,” the IPPR report states.
“Asset price rises boost household wealth, allowing consumers to finance higher levels of current spending through debt,” it adds.
And that’s not the only problem.
“High and rising asset prices exert upward pressure on the exchange rate by increasing international demand for UK assets [all else being equal], making UK exports more expensive and imports cheaper.”
That also puts pressure on the state of the UK economy.
“These processes created a self-reinforcing cycle in which increased levels of bank lending pushed up house prices, and high house prices allowed consumers to borrow more against the rising value of their home,” the IPPR warns.
And over a number of years that pushes the UK deeper and deeper into a position where the only way we can keep going is through borrowing more and more. Until we can’t, and a new financial crisis ensues.
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How they could do it
The Bank of England was given powers to set interest rates for the UK in 1997 – with a remit to control price rises and promote economic growth.
But it wasn’t asked to look at house prices specifically.
The IPPR thinks it should. “The Bank of England should be given an explicit house price inflation target,” its report states.
“The aim of such a target would be to set property price expectations (a critical driver of house price inflation), reduce excessive debt, and reduce capital inflows by disincentivising property investment.”
And it already has the powers to do it.
The Bank of England’s Financial Policy Committee currently places controls on loan-to-value and debt-to-income ratios – that is to say what percentage of a house’s total value you can borrow and how big a loan you can get compared to your wages.
But as things stand it does so cautiously. A specific target would mean it could go far further.
If controls on mortgage lending aren’t enough, the IPPR thinks the Bank should also be allowed to ask the Government to change housing policy – for example build more public housebuilding, change planning policy or curb on overseas purchases of UK homes.
Put together it could mean the Bank could – and they argue should – stop house price rises for good and lead to a more balanced economy for all.
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