House prices should be prevented from rising by more than 5pc a year to stop another bubble destabilising the economy, a top property institute has urged.
With excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed. Such a policy could be implemented with caps on elements such as loan-to-value ratios, loan-to-income ratios, and mortgage durations, or imposing ceilings on the amount banks are permitted to lend, should prices exceed a given limit.
Deliberate interventions in the economy have been made to promote lending and particularly into housing (again) to stimulate the economy. To the extent this is a success, it is creating activity in the housing market which is dependent on those interventions – IE, it is a bubble.
So now RICS want to limit the bubble to two and a half times the rate of growth of those prices in the inflation target. They promote a range of further economic interventions to achieve the policy.
This is socialism, that is, economic planning. It never achieves the ends aimed at. If it did, the world would adopt all-round planning, which requires public ownership of the means of production, and the utopia of Communism would be “ushered in”.
Regional analysis of the recent employment figures showed that the South East was doing best and the North East worst. Look at the regional price data for the past decade (eg this) and you’ll see the rate of house price growth slows further from London. These facts are consistent with the so-called Cantillon Effect: new money in an economy produces distortions. Price inflation happens nearest the source of the new money.
The housing market and financial system are already awash with absurdity but RICS wants even more intervention. Young people are priced out of the housing market and groan under the burden of high rents. Some homes may be due price rises well over 5%, if they are currently severely under-priced. Some people have made apparent gains in the value of their homes which dwarf their lifetime incomes. Capital is being poured into housing, which is essentially a durable consumer good not a capital good, where it cannot increase real wages.
In a nutshell, here we go again. Policy is producing undesirable side effects, frankly unjust ones, so the same people who call for economic interventions are calling for yet more intervention to fight their consequences. This is folly and it leads only in one direction: impoverishment.
Far better to abandon the monetary socialism which got us into this mess and enable a just social system of inclusive prosperity based on meeting the real needs of other people. That requires honest money which holds its value and which is not subject to manipulation. It means commodity money and free banking, not fiat money and central banking.