Yesterday’s statement by the Royal Institute of Chartered Surveyors (RICS) was a very full and frank analysis of the UK property market. In simple terms the RICS believes that UK property prices need to be controlled in the future to reduce the potential for house price bubbles and the boom and bust scenarios we have seen in years gone by.
These comments have attracted a response from the Bank of England with a suggestion that perhaps closer vigilance of the UK property market is required in the future. This is all good and well, looking to control property prices to reduce the chances of boom and bust scenarios commonplace in the past, but how would this affect investor sentiment?
Stalin like policies
At this moment in time one of the major attractions of the UK property market is the fact that it is a “free market” which is lightly regulated with property price movements at the whim of investors. It is basically a balance of supply/demand which is pushing UK property prices back to pre-2008 highs. While further increases in property prices could be dangerous in the short to medium term, and impact the economy, is there not far greater danger meddling in free markets?
Quote from PropertyForum.com : “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.”
If Bank of England was to be more hands-on with regards to the control of the UK property sector, and property prices, where would this end? The Bank of England has access to finance data and economic data which will never see the light of day and while the property market is obviously a major element of the UK economy, interest rates and various financial policies can cool markets and perhaps make investors reconsider their policies. Why does the Bank need to be more proactive and more hands on in the future?
Would greater control force foreign investors from UK shores?
One of the major elements of the day pushing the UK property market to new highs is the massive influx of overseas investment finance. This is something which has pushed the London property market to new highs, the money keeps on pouring in, and while there are many reasons why this is the case, not least because the UK is not tied into the euro, over regulation could be a disaster.
The UK property sector is regulated with regards to its structure and the way in which it is run across the UK. Previous governments have in tandem with the Bank of England attempted to influence the supply and demand of finance, through interest rate movements, to cool overheated markets and on the flip side of the coin, interest-rate movements can help to inject confidence and increased demand in difficult markets. If, as RICS has suggested, a cap of 5% was placed upon the maximum increase allowed in UK house prices per annum how would this work?
The UK government and the Bank of England have a number of economic and financial levers at their disposal which have historically allowed them to control the flow of finance which impacts all areas of the UK economy. The property sector has been an integral part of such policies in the past but to actually place a cap on the price of UK properties is dangerous and bizarre.
If you had seen UK property prices rise by 4% in the first quarter of a calendar year, and the 5% cap was in place, what would be your incentive to invest?