The Royal Institute of Chartered Surveyors has said a cap on house price inflation would prevent another housing bubble, reckless bank lending and a dangerous build up in household debt.
The trade body said with excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed.
It claimed such a policy could be implemented with caps on elements such as loan to value ratios, loan to income ratios and mortgage durations or imposing ceilings on the amount banks are permitted to lend should prices exceed a given limit.
Sending a clear and simple statement to the public that the Bank of England will not tolerate house price rises above 5% would help restrict excessive price expectations across the country, said RICS.
The body said it believed this policy would “discourage households from taking on excessive debt out of fear of missing out on a price boom” and discourage lenders from rushing to relax their lending standards as they compete for market share.
Elements of a scheme such as this were used in Canada between 2008 and 2012 during Bank of England governor Mark Carney’s tenure as the Bank of Canada governor.
In Canada the national regulator gradually reduced the minimum mortgage repayment period, the amount buyers could potentially borrow in relation to their deposit, and imposed more stringent credit checks.
Joshua Miller, RICS senior economist, said the Bank of England has the ability to take the froth out of future housing market booms without having to resort to interest rate increases.
He said: “Capping price growth at, say, 5% 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.”
Stuart Law, chief executive of property firm Assetz, said the plan was “outrageous”.
He said: “No one wants to see house prices rising at outlandish levels but artificial price controls always end in tears and are not the way to approach this issue.
“A cap on property price increases would lead to a corresponding cap in developers building more homes for our rapidly growing population due to the suppression in demand.”
Law said tackling rampant house price inflation had to address the underlying shortage of supply – the reason house prices were rising so fast.
He added : “The best way to temper rising prices is by building more homes and placing a temporary block on NIMBYism.
“A useful mechanism would be to compel local authorities to pre-zone and compulsory-purchase green field and green belt land which is then automatically released for building homes in areas where property prices are exceeding, say, 5% annual increases.
“Farm land is cheap and if accompanied by substantial affordable housing requirements would improve supply and help reduce price growth. This is an extension of the recent positive step to force local authorities to identify brown field land which could receive planning quickly and efficiently.”
He warned that RICS is “effectively asking for market prices to be manipulated and thereby falsify the property market”.
Ben Thompson, managing director at the Legal & General Mortgage Club, said: “There is clear logic to wanting to stop out of control house price growth in so much as this would ultimately enable younger people to buy their first home at a younger age and would limit the amount of household debt taken on, enable a better savings culture and perhaps deliver other benefits too.
“However instead of placing arbitrary caps on house price growth the UK ought to solve the supply and demand problem in the housing market by building many more new homes. This would deliver the same benefits in a more natural way with less regulatory intervention."
Charles Haresnape, managing director of residential mortgages at Aldermore, said: "I cannot see how the RICS proposals to cap house price rises at 5% per year would work. “Furthermore its proposal to introduce house price caps on a regional basis could lead to unintended consequences potentially creating a postcode lottery system.”
Haresnape said that while average house prices were rising at 5.4% annually it was being driven primarily by London while in many other regions of the UK house prices are flat or falling.
He added: “London house prices are driven up by overseas cash buyers and the high demand for housing in the capital. It is therefore jumping the gun to be warning about a house price bubble at this stage.
"House price inflation can be controlled by increasing the supply of houses. If we build more new homes or convert existing empty buildings into affordable housing this will put a natural break on house prices."
