Taking the Heat out of the Housing Market

Concerns have grown about an overheated residential property market.

Chart showing the Nationwide House Price Indices with Q1 2007 as the benchmark

It is hard to avoid the press headlines about an overheating housing market in the UK. The latest data from Nationwide says that prices were up 10.9% in the year to April, the first time double digit growth has been recorded in four years. However, as the graph above shows, the focus on the last 12 months means that the bigger picture is ignored:

The government has been accused of pushing up house prices through its Help to Buy scheme, designed to assist homebuyers with small deposits. However, Mr Cameron has made clear that the task of controlling the property market rests with the Bank of England and, in particular, with its relatively new Financial Policy Committee (FPC).  The indications are that the FPC will tighten mortgage lending by ‘macroeconomic’ measures, such as requiring mortgage lenders to hold more capital against property loans or capping loan/income or loan/value ratios. It is possible the FPC could also ask the Government to reduce the £600,000 ceiling on Help to Buy purchases, although the most recent evidence suggests this is not driving the London-centric price rises.

The Bank does not want to use a rise in interest rates as its first line of defence on rising property prices, as it still wants to keep rates unchanged for about another year. Whether it can maintain that stance is the subject of some debate: the contents of the FPC’s macroeconomic toolkit are untried in recent times.