The influential Royal Institute of Chartered Surveyors (RICS) has today issued a report which calls upon the Bank of England to take control of UK house prices and effectively dictate their movement in the future. The Institute has suggested a maximum annual increase in property prices of around 5% after which an array of financial levers should be pulled to reduce interest and make finance less affordable.
While these are certainly controversial suggestions there is no doubt that more and more people are concerned about the ever-growing price of UK property and the fact that first-time buyers are to all intents and purposes being priced out of the market. So what are the options open to the Bank of England?
Control of mortgages
The RICS is calling for the Bank of England to introduce rules which would not allow mortgage providers to forward more than 80% of a property’s value in the shape of finance. The idea behind this is that the 20% cushion between mortgage funding and the value of the property would in traditional markets give some headroom in the event of problems in the future.
Quote from PropertyForum.com : “Despite the fact that many estate agents in the UK have not always enjoyed the best of reputations in business, rightly or wrongly, statistics today reveal that there are 562,000 people employed in the property sector.”
This headroom would likely avert the kind of negative equity issues we have seen in years gone by and therefore not only give investors more confidence in the market but also allow mortgage providers to make greater funds available. It is interesting to see that in Canada, where Mark Carney the new Governor of the Bank of England was born, there is a ban on 100% mortgages with a minimum 20% deposit required.
Is it time to tweak the length of mortgage arrangements?
It was very interesting to see that the RICS commented specifically upon the terms of mortgage arrangements and in particular the maximum length. The obvious idea here is that the longer a mortgage lasts the more time individuals have to pay back their finance, which perhaps leads to some people overextending themselves. Whether or not this is the case is a matter for debate but there is no doubt that by shortening the length of traditional mortgage arrangements this would perhaps more focus the minds of individuals?
When you take into account the proposed changes in mortgage financing across the UK this seems to further illustrate the fact that first-time buyers may well be fighting a losing battle. The UK government is currently offering financial incentives to those looking to buy their first property although this will not last forever. In a particularly disturbing quirk of fate, this long planned government financial assistance is actually feeding the property market frenzy across the UK, pushing prices higher and higher out of the reach of more first-time buyers of the future.
While the suggestions made by RICS will not be to the liking of everybody the fact is that it has started a debate about the state of the UK property market and whether indeed we are heading for a house price bubble. A debate at this moment in time, comparing the property market performance to that of the economy, will at worst focus the minds of individuals, and at best perhaps stop many from chasing house prices in the UK to unsustainable levels.