The accountancy and services firm said that the MMR will dampen the “simmering housing market” as caution by lenders, tighter lending criteria and an increase in house building will cool prices, preventing an unsustainable boom.
The forecast predicts prices will rise by 7.4% this year and 7.2% next year, easing back to 4.2% in 2016 as the mortgage guarantee scheme ends.
The report also warns that the FCA must use their recently gained macro-prudential tools to ensure that the income multiples of borrowers do not become too stretched.
The forecast predicts their policing of income multiples in London, which remains the main constraint to purchases in the capital, will help avert a housing bubble.
This will work alongside new construction orders to help prevent house prices overheating.
Peter Spencer, chief economist of the EY Item Club, said: “The housing market is not experiencing a typical debt-fuelled recovery.
“Gross mortgage lending has increased but this has largely been financed by an increase in repayments by existing borrowers.
“New mortgage lending remains at rock bottom while Government initiatives such as the ‘Help to Buy’ (HTB) schemes will be having little impact on prices in London, where activity is fuelled by cash rather than mortgage borrowing.
“The FCA will assume crucial importance to ensure multiples do not become too stretched and that affordability is scrupulously checked.
“If these controls are rigorously applied this will eventually constrain London prices, particularly in hotspots like Hackney, and head off problems when interest rates rise.”
