The Bank of England should freeze house prices for five years and set a separate new target for house price inflation, the Institute for Public Policy Research (IPPR) has suggested.
The zero target could mean house prices falling by around 10% in real terms as other prices and wages continue to rise, and would make homes more affordable.
Only after expectations of constantly rising house prices have been “reset” would they be allowed to increase again – but no faster than the general consumer price inflation target of 2%. This means no further growth in the real value of people’s homes.
Mark Hayward, NAEA Propertymark, chief executive, said: “Excessive house price growth is certainly not something we want to see, but homebuyers make purchases on the basis of capital appreciation and the belief that their investment will be protected and enhanced.
“We encourage all measures to help first-time buyers get onto the housing ladder, but with property transactions at an already low level, this sort of tampering could have unintended consequences.”
IPPR’s call came as part of a wider plan to rebalance the UK economy away from finance, and reduce the risk of another financial crisis, published as a discussion paper.
It envisages that the Treasury would task the Financial Policy Committee of the Bank of England with meeting a target for annual house price inflation.
The Bank would restrict mortgage lending by insisting on higher initial deposits, stricter ceilings on the ratio of loans to income, and other steps to control credit in the property markets. It would also be entitled to ask the Treasury to step up investment in house building.
The IPPR paper argued that the financial sector’s dominance since the 1980s has contributed to a strong pound, which has hurt exporters, particularly the manufacturing sector.
It said the UK financial sector has attracted surplus capital from other countries and channelled it into loans to British consumers and to speculative investors – including as mortgage lending.
It also concluded that speculation over house prices and related securities contributed to their 10-fold increase between 1980 and 2008, and has increased the economy’s vulnerability to financial crises.
Grace Blakeley, IPPR research fellow and author of the discussion paper, said: “Since the 1980s, the UK’s business model has rested on attracting capital from the rest of the world, which it has channelled into debt for UK consumers.
“The 2008 crisis proved that this is unsustainable. We need to move towards a more sustainable growth model, one built on production and investment rather than debt and speculation.
“To do this, we must break the cycle of ever-rising house prices driving property speculation, crowding out investment in the real economy.
“Over the longer term, we should build up our manufacturing and knowledge-based industries and reduce the significance of our finance sector to the economy, including by curbing its worst speculative excesses.
“We argue for sweeping reforms to taxation of the financial sector, including the introduction of a financial transactions tax on currency trading, combined with an industrial strategy focused on boosting the UK’s exporting sectors.”