Think tank recommends the Bank of England creates a separate inflation target for house prices with a target rate of zero for five years.
House prices should be held at a rate of zero inflation to rebalance the UK economy and to prevent another housing crisis, according to the Institute for Public Policy Research (IPPR).
The think tank’s report recommends the Bank of England creates a separate inflation target for house prices with a target rate of zero for five years.
This will help real wages catch up to house prices and make property more affordable for workers, according to the IPPR. It says a five-year freeze would result in an effective reduction in property values of 10 per cent if normal inflation rose by 2 per cent year-on-year.
After the initial five-year freeze on house prices, the IPPR says the inflation target should be held at 2 per cent alongside normal inflation in order to prevent house prices from getting out of control in future.
The report adds: ‘The target should be implemented using macroprudential tools such as capital requirements, loan-to-value, and debt-to-income ratios. Since lending is not the only driver of house price inflation, the government should accompany this target with active housing policies designed to increase housing supply and restrict overseas purchases of UK residential property.’
The report envisages that like regular consumer price inflation, the Treasury would be the body to set the target rate on behalf of the Bank of England.
Grace Blakeley, IPPR research fellow and author of the discussion paper, comments: ‘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.’
This article originally appeared on our sister website Moneywise.