Measures need to be taken to cool house prices ñ How UK regulators can dampen house prices
British House prices have soared by roughly 10% since this time last year. This figure is dwarfed by the considerable price increase, 18.7% from April ë13-April ë14, within Londonís housing market. Yet both figures are interlocked, as growth is emanating out from the capital, fuelling prices across all UK regions.
The Bank of Englandís financial policy committee, set up by George Osbourne to stop asset bubbles from unbalancing the economy, release a fresh report on Thursday which will contain measures to combat the unsteady housing market.
Growing consumer confidence, coupled with falling unemployment have been cited by a number of market analysts as the two key components behind the recent boom in the property market. Within the next couple of months, it is speculated, this recovery will reach its next stage and subsequently this could renew demand and consumer vigour
within the housing market; a reality which would mean that house prices are likely to rise.
However, governmental and regulatory action has not been stagnant, due to the widespread effect of the housing market on society.
The Market Mortgage Review (MMR), implemented in April, introduced firmer rules for lenders necessitating thorough checks on a borrowerís ability to pay their loans back. Although a decline in mortgage approvals had been noted in the months leading up to April, this has put further pressure on banks to adopt a moderate approach and lend more responsibly.
Additionally, in January, the Bank of England reformed its Funding for Lending scheme implemented in 2012. The scheme was devised at a time when the housing market was floundering and was intended to bolster the economy, increasing bank lending by up to £70bn. However, this year the Bank stopped allowing commercial banks to issue mortgages.
The ramifications of these above measures are only starting to be seen now, yet there is so much more to do. Here are some prospective paths which policymakers could plough down:
Affordability ñ Under new guidelines, specified by the MMR, borrowers have to prove they have the ability to repay loans even if the interest on them rises by 3.5%+ on the lenderís Standard Variable Rate. The FPC could recommend, in the coming report, a higher level on the back of Governor Mark Carneyís recent remarks that interest rates might rise sooner than expected.
Capital Requirement ñ Force is sometimes needed to keep the troops in line; the FPC could endorse requirements for banks to hold more capital to cover dicey home loans. This would put further pressure on banks to be more selective when lending money. This could have far reaching, albeit gradual, effects on the housing market.
Help to Buy ñ Last year, the government began guaranteeing mortgages amounting at up to 95% of the value of a property. This measure was intended to aid first time buyers incapable of affording sizeable deposits. In order to qualify for the plan, properties must be valued at £600,000 or less. The FCC could approve a governmental move to lower the cap for property qualification.
Stamp Duty ñ A far more risky manoeuvre, raising stamp duty could prove severely unpopular with the electorate, especially when the tax raise on top-end property purchase is taken into consideration. Although, this could prove effective in reducing house prices throughout the country, with a general election around the corner, the government would be hesitant to jeopardise their reputation by engaging in such radical moves.
Mortgage Caps ñ Chancellor of the Exchequer, George Osbourne, has stated that he is prepared to bestow powers upon the Bank of England which will allow them to cap home loans in less than a year. This political backing could spur the Bank to endorse caps on the size of mortgages proportional to the price of the property in question. However, this would not address the issue of cash purchases, which are driving steep price rises, particularly in the capital.
So, the content of the FPCís report could prove very influential in the dampening of the house market. It is worth making mention of the FPCís power of rhetoric, as it wields a fairly heavy arsenal behind the scenes. The FPC could threaten that if the boom gets too great to control, its sister body, the Monetary Policy Committee, would have no choice but to drive up interest rates. But by acting more directly, the FPC has an opportunity to increase mortgage rates through strengthening the MMR, increase the capital that must be held by banks against high loan to value mortgages or advocate the policies of Lloyds and RBS and cap loans in excess of £500, 000 to four times a borrowerís income.
This will show a marked statement of intent, because doing nothing is no longer an option.