Call for Bank of England to have Set Targets to Control House Price Inflation

The Institute for Public Policy Research (IPPR), a think tank based in London, believes that the Bank of England should be granted the ability to regulate house prices and freeze growth at 0% for the first five years.

This opinion has been stated in its recent publication, ‘On Borrowed Time: Finance and the UK’s current account deficit’. Grace Blakeley, author of the research in the document, includes that the Financial Policy Committee (FPC) of the Bank of England should be able to use a revised mandate set by HM Treasury in order to gain some control over house price inflation.

Blakeley states: “This would be equivalent to the remit the Monetary Policy Committee (MPC) has to control consumer price inflation. Under such a target, the Bank of England should aim to keep nominal house price inflation at (say) 0% for an initial period – perhaps five 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. The target should be implemented using macroprudential tools, such as capital requirements, loan-to-value, and debt-to-income ratios.

“Since lending is not the only driver of house price inflation, the government should accompany this target with active housing policies designed to increase housing supply and restrict overseas purchases of UK residential property.”

Discussing the issue of price inflation, it is also stated in the report: “In the fourth quarter of 2017, UK house prices were almost 10 times their value in the fourth quarter of 1979. Consumer prices increased just five times over the same period.”

“During this same period, housing grew from 53-66% of households’ net assets, creating a wealth effect that allowed households to borrow more, financed by cheap funds from abroad.

“Between the late 1980s and 2008, household debt increased from around 50 to 100 per cent of GDP and savings rates also fell to all-time lows by 2007. Equity withdrawal also grew every year from 1997 to 2007, peaking at £140 billion annually in 2006 before sharply declining during the financial crisis. Over this period there is a clear correlation, not only between mortgage debt and house prices, but also between consumer credit and house prices, showing this wealth effect in action.”

Responding to the proposals, Mark Hayward, chief executive of NAEA Propertymark, has commented: “Excessive house price growth is certainly not something we want to see, but home buyers make purchases on the basis of capital appreciation and the belief that their investment will be protected and enhanced.

“We encourage all measures to help first-time buyers get on to the housing ladder, but with property transactions at an already low level, this sort of tampering could have unintended consequences.”