It may have come to your attention recently that there has been a lot of noise in the industry with relation to the rise in house prices, with some analysts and industry insiders worried that we’re approaching a housing bubble like we’ve seen in the past.
Now, the Royal Institute of Chartered Surveyors (RICs) have added their voice to the debate, urging the Bank of England to limit the rise before we experience another boom and bust cycle.
This would mean the central bank would have to introduce new measures to ensure that people are not over borrowing. In the past, this has always meant an increase in interest rates, but there are other steps the BoE could take, such as putting caps on loan-to-value ratios, or imposing lending ceilings if house price inflation were to exceed 5%.
The problem with this approach is that house prices across the UK aren’t rising at the same rate and while the capital has seen an increase in prices and demand, this doesn’t necessarily apply to the rest of the country.
Spotting the Financial Risk
According to a RICs report, in order to avoid the risks associated with quickly rising house prices, the BoE needs to send “a clear and simple statement to the public that the Bank will not tolerate house prices above 5 percent”. This, they say, will discourage property buyers from taking on a debt that they can’t afford. This is something that many people do when they feel that they are missing out on a price boom.
It would also send a clear message to lenders designed to discouraging a more relaxed approach to lending as competition in the sector hots up. "It would be a speed bump, a warning indicator," RICS chief economist Simon Rubinsohn told BBC radio. "What we're trying to do is manage the volatility in the market."
Rublinsohn went on to acknowledge that any policy that is put into place would absolutely need to address the matter on a regional basis, or include regional dimensions in order to address varying pricing.
For example, he said, the fact that prices in England and Wales are considerably weaker than they are in the capital would have to be taken into account. However, according to a former Bank deputy governor Howard Davies, this would still not address the real, underlying problem, which is the lack of new property development.
"The real problem is that we are not building enough properties," he said. "That is what we should be working on. I don't think a price cap across the country would work."
New builds are on the increase, with new orders showing an increase of 20% in recent months, but this is still 5% short of the long-term average that we’ve seen in previous years.
Of course, the government Help to Buy scheme has helped increase that figure and this is likely to continue into the new year when the second phase of the scheme is introduced, but is it enough?
Recovery is happening, but it’s a tenuous thing and it’s important that the financial sector get it right if we’re to see a complete recovery and further growth in the market. This could mean that it’s necessary to supervise price rises reasonably strictly, with an eye on each region and a sensible approach.
Article by Brett MacDougall, Director of Hunters Camberwell branch. Circle Brett on Google+ HERE.