Labour is said to be considering whether the Bank of England should be mandated to limit house price growth. According to The Guardian, this would be done not via interest rates but via mortgage regulation as overseen by the financial policy committee (FPC). The FPC already curbs some mortgage lending, principally by capping loan-to-income ratios of more than 4.5 to just 15 per cent of new mortgages. But this is for financial stability reasons, rather than to temper house price growth.
John Healey, the shadow housing secretary, is considering whether the FPC’s remit should be extended to cover the latter. This raises two questions: Could it work? And, if it could, is it a good idea? Mr Healey is certainly right to be looking at demand-side reforms alongside the party’s ambitious supply-side ideas. When it comes to house prices, there is more that could be achieved, and quickly, using demand levers than there is using supply levers.
Nevertheless, each side of this equation influences prices to some degree and so this brings us to the first challenge: it would be tough on the Bank to expect it to control house price growth with only macroprudential tools. Without also being given responsibility for planning, capital build subsidies, and so on, it would be like trying to steer a boat with one oar.
This issue might be addressed in part by refining the mandate, however. Rather than being charged with keeping house price growth within a certain range, a more reasonable objective would be to cap the price-to-rent ratio. This is the measure that is important in terms of credit influencing house prices. While rents reflect the supply of housing versus the need for it (ie, as accommodation), prices reflect the investment value of buying a property that yields a given rent.