The Bank of England should restrict house price inflation to help rebalance the UK economy, according to the Institute for Public Policy Research.

The Bank of England should freeze house price growth for at least the next five years under a separate new inflation target, a think tank has said.

The Institute for Public Policy Research (IPPR) argues that once expectations of constantly rising house prices have been ‘reset’, property values should not be allowed to climb by more than 2% a year.

The IPPR believes that zero growth would make property a significantly less attractive investment, leading to more money being put into other parts of the economy.

It adds that such a move would also lead to property values falling by 10% in real terms over five years as other prices and wages continued to rise.

Why is the IPPR making this case?

The IPPR believes that the UK economy needs to be rebalanced away from finance to reduce the risk of another financial crisis.

It claims the financial sector’s dominance since the 1980s has contributed to the strong pound, which has hurt exporters, particularly the manufacturing sector.

It adds that the financial sector has attracted surplus capital from other countries, which has been channeled into loans for UK consumers and speculative investors.

Instead it says the country needs to move towards a more sustainable model through building up its manufacturing and knowledge-based industries.

Grace Blakeley, author of the report, explained: “To do this we must break the cycle of ever-rising house prices driving property speculation, crowding out investment in the real economy.”

Above: five-bedroom house for sale in Sheering near Bishop's Stortford

Who does it affect?

The idea of stalling house price growth is likely to be welcomed by first-time buyers who are struggling to get onto the property ladder.

Freezing increases in property values would also improve affordability for those looking to trade up the property ladder.

But the IPPR suggests the bank achieve its target by restricting mortgage lending through making lenders impose higher deposits and stricter loan-to-income ratios, which would make it harder for some people to get a mortgage.

The move would also be unpopular with buy-to-let landlords. The prospect of zero capital gains for five years, coupled with increasing costs as a result of rising interest rates and tax changes, would be likely to trigger many to leave the sector altogether.

What’s the background?

There is a high correlation in the UK between house price inflation and consumption growth.

So while freezing property price rises may lead to some money being channeled into different areas of the economy, it could also lead to a fall in household spending, which would hurt growth.

It is also likely to be an unpopular policy as for many Brits their home is their most valuable asset, and one they plan to use to substitute their retirement income, either through downsizing or equity release.

It may also be difficult to impose zero house price inflation through mortgage controls, as more than a third of properties are purchased in cash, according to government figures.

As a result, imposing the controls suggested by the IPPR would penalise people who needed to borrow to buy a property while favouring those with more cash by enabling them to acquire an asset more cheaply.

Top 3 takeaways

  • The Bank of England should freeze house price growth for at least the next five years under a separate new inflation target, says IPPR
  • This would end Britain’s reliance on property investment and help avoid another financial crisis
  • After expectations of constantly rising house prices have been ‘reset’, property values should not be allowed to increase by more than 2% a year

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