The bank of England should limit house prices from increasing to 5% a year says The Royal Institution of Chartered Surveyors.
The Royal Institution of Chartered Surveyors said that a 5% annual rise should trigger caps on how much people can borrow relative to their incomes or property value. However it is not suggesting that the sellers should face a limit on how much they should charge for their homes.
After a few years of inactivity during the financial crisis the UK housing market has begun to pick up. Some forecasters are suggesting increases in house prices could break through the 5% barrier this year due to the increase in demand from first-time buyers at the same time when the number of homes for sale remains low.
Senior economist at Rics, Joshua Miller, said that it is important to stop any debt-fuelled house price advance.
“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,” he said.
“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.”
Mark Carney, the Bank's governor told MPs on Thursday that the bank was vigilant on house prices but parts of the country are yet to see any recovery in the housing market, reports the BBC.
Simon Rubinsohn, chief economist at Rics, told the BBC that the cap was more of a “speed bump” for the housing market “so people wanting to enter the market are aware of some of the risks”.
Mr Rubinsohn said the 5% level could be debated and there needs to be a regional dimension to reflect housing market activity in different areas of the UK.
Sir Howard Davies, former deputy governor of the bank does not believe that a cap would work. “The problem is that we are not building enough homes,” he said.