RICS: Bank of England should limit house price growth to 5% a year

The Royal Institution of Chartered Surveyors has called on the Bank of England’s Financial Policy Committee to consider limiting annual house price inflation to 5 per cent to prevent another housing bubble.

It also recommends the FPC, which has the ability to intervene if market risks begin to emerge, limit reckless bank lending and a “dangerous” build up in household debt. RICS says it is not “wedded” to a 5 per cent cap, but it says it wants house prices to rise in line with nominal incomes, which have grown by around 3 per cent a year since the 1990s.

The FPC has the power to make recommendations to the Prudential Regulation Authority to cap loan-to-value and loan-to-income ratios if it feels necessary, although this is not binding.

However, it does have the power to force banks and building societies to hold more capital on loans against property or, on a more granular level, it can force banks to hold more capital against higher LTV lending, for example.

RICS has called on the FPC to recommend limiting loan-to-value ratios, loan-to-income ratios and mortgage durations and has even called on the committee to impose ceilings on the amount banks are permitted to lend, should prices exceed the threshold. RICS argues this could also be done on a regional basis, rather than a uniform approach for the entire UK.

This, it says, would discourage households from taking on excessive debt and would discourage lenders from rushing to relax their lending criteria in order to grab market share.

According to the latest house price statistics from Halifax, house prices increased 5.4 per cent year-on-year in August, from £160,292 to £170,231.

There have been many warnings that a house price bubble is emerging and it has been argued this will be amplified by the launch of the second part of the Help to Buy scheme, a £130bn mortgage indemnity guarantee scheme, in January.

RICS senior economist Joshua Miller says: “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 percent is one way of doing this.

“This cap 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.”

Yesterday, BoE governor Mark Carney told the Treasury select committee there needs to be an open debate about introducing loan-to-value caps to curb risky lending.

He rejected suggestions the housing market was booming by pointing out it was performing very differently across the country.

Chancellor George Osborne wants the financial policy committee to have the power to cap LTVs but the FPC rejected it last year on the basis it should be a decision for Parliament.