The RICS has called on the Bank of England to set a 5% a year cap on house price growth. That seems sensible enough – no-one wants another house price boom. But how do you measure 5% growth?
If you took the Halifax house price index as your benchmark, the Bank would have to start restricting mortgage availability right now. The Halifax, after all, says that prices in the three months to August were 5.4% higher than in the same three months a year earlier.
Yet, no-one is suggesting that areas outside London and the South East are anywhere close to experiencing a boom.
Data from the Office for National statistics illustrates the point perfectly. The ONS figures showed that by June this year, prices across the UK were 3.1% higher than they were a year earlier. But that average figure was made up of steep price rises in London (up by 8.1%), more modest rises in the Home Counties (up by 2.9%) and falls elsewhere. In Scotland, prices were 0.9% lower than a year ago. Take London out of the equation and prices over the last year were up by just 1%.
In short, adopting UK average price growth as a trigger for intervention to limit mortgage availability will significantly disadvantage buyers in areas where price growth is not a problem.
Frankly, that’s nonsense. The Bank of England has already said that it has the tools to limit mortgage lending if it sees a bubble arising and the call for a 5% seems artificial and unnecessary.
But if the bank were to adopt a ceiling on house price growth, it would have to use a measure that allowed for substantial differences in markets across the UK.
It could, of course, define a price bubble as one in which prices are rising by more than 5% a year in most (if not all) areas of the UK. Or, it could ask lenders to apply stricter criteria in some locations than in others. That, however, would merely stop people moving to where they wanted to live.