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New Measures To Control UK House Price Growth

James Boston
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New Measures To Control UK House Price Growth

The Bank of England (BoE) Governor, Mark Carney, is currently completing a press conference to outline the key findings in the Bank’s half yearly Financial Stability Report. The main tenet of this report, which was produced by the Carney chaired Financial Policy Committee (FPC), is a proposal to take measures to cool Britain’s runaway house price growth.

Average house price expansion in the UK is now topping 10% annually, this however is a two speed system. House prices in London and the surrounding affluent areas are increasing at almost 19% per annum while less well off areas of the country are seeing prices rise at a more manageable 6%. The conundrum faced by the monetary authorities is how to cool the top end of the market without damaging growth at the lower end.

The proposal being put forward this morning by the FPC is aimed directly at the higher end of the housing market and therefore by association it’s objective is to dampen the growth in London house prices. Specifically the proposal seeks to limit the amount of a bank’s residential loan book that can be lent at salary multiples above 4.5% to just 15% of the book. The obvious implication of this cap is to limit access to more expensive mortgages thus reducing demand for higher priced houses. It also has a second effect however and this is to indirectly tie house price growth to wage growth, in which case rising house prices will be permissible on the condition that the fundamental economy is growing accordingly, in essence it allows free house price growth but removes some of the risk of this occurring on the basis of an asset price bubble.

The measures announced today will take effect from October of this year, there may however be a flurry of mortgage approvals ahead of this date which will skew housing metrics over the coming month’s.

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