Labour’s suggestion that the Bank of England sets a ‘ceiling’ misses the point
For the last couple of years housing has been awash with policy ideas from both sides of the House of Commons chamber. One that stood out recently was Labour’s proposal that the Bank of England should extend its remit to target house price inflation, in addition to its 2% target for general consumer price inflation.
On the surface, you can see why the proposal appeals to potential new homebuyers given concerns over rising house prices, especially in London and the South-east, or how it would reduce investor demand. The tool for this, however, wouldn’t be interest rates, but by introducing restrictions on mortgage lending – the key enabler of demand for house purchases – through other routes such as limits on loan-to-value or loan-to-income ratios.
In the UK, we’ve already had some prudential measures on lending introduced under the Mortgage Market Review in 2014. This came in the form of clampdowns on interest-only mortgages and more stringent affordability checks, followed by the Bank of England allowing only 15% of new mortgages to be at multiples higher than 4.5 times a borrower’s income. Perhaps predictably, house price growth did not slow in subsequent years, but accelerated above wage growth and general inflation and took average house prices above pre-recession peaks in most regions of the country.
Property transactions have also remained static and are almost a third below pre-recession levels. Similar lending controls introduced in Canada and Ireland in recent years have resulted in a mild slowing in house price inflation, but this was also accompanied by reduced transactions volumes. It also limited the ability for first-time buyers to access mortgage finance – the demographic that price-cooling measures were intended to help in the first place. For most in UK housing, the main flaw in this policy should be clear: central banks have no control over housing supply.
For most in UK housing, the main flaw in this policy should be clear: central banks have no control over housing supply
The private sector builds around 80% of new homes in Great Britain and house price growth and effective demand are key to housebuilding activity. Looking through the largest housebuilders’ annual reports, the availability of mortgages is highlighted as one of the key determinants of sales and activity, with Persimmon flagging any restrictions on lending as a “high risk to future output” and Barratt labelling it a “critical input”. The conclusion follows that curbing mortgages curbs housing market activity, and, therefore, limits the intended effect on house prices.
There’s also the regional story to consider. At any point in time, different areas of the country will be experiencing different housing market conditions. Take the current contrast between falling house prices in London and 5% growth in Greater Manchester, or the oil-related swings in Aberdeen’s property prices and a policy targeting a nationwide rate of house price inflation looks impossible to implement.
Moving away from the reliance on the price and margin-driven model of private housebuilders in the UK is crucial
Moving away from the reliance on the price and margin-driven model of private housebuilders in the UK is crucial. Whether this is through increased investment in local authorities’ depleted planning departments, implementing models used by other countries on zoning land for rental, low-cost or social housing tenures, or increasing the role of publicly-funded housing construction, it’s clear that influencing the supply of new housing is a matter firmly in the government’s domain.
Given the multitude of factors at play in housing, it makes a house price target appear even less achievable and sounds the alarm of populism over practicality.
Rebecca Larkin is Senior Economist at the Construction Products Association