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Industry needs to cool itself

Policy is faced with a sectoral problem in the housing market, but interest rates provide only a system-wide policy tool. It is surprising that there has been almost no discussion of the obvious solution – temporary direct sectoral control on the providers of finance for house purchase. For example, higher capital requirements against housing loans by mortgage lenders and/or a higher percentage minimum downpayment from borrowers.

There are always problems – the level at which controls should be introduced; the danger in particular of having stood idly by until late in the boom (as now); problems of leakages and of equity in their incidence and the process of removing them in due course. But all of these are a small price to pay if steady cooling of the domestic property market could be achieved.

In the past, such direct credit controls had a bad name because they obstructed the free working of the capital market, which needed freedom after many years of controls during and after the Second World War. Now these markets have had many years of freedom but are using it to feed a de-stabilising sectoral boom – a degree of temporary obstruction would be entirely justified.

Roger Alford

Reader Emeritus

London School of Economics




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