‘House price growth should be capped at 5%’

Prices are up across the UK but dropped in Scotland. Picture: Jane Barlow

The Royal Institution of Chartered Surveyors (Rics) wants a  5 per cent limit on annual price rises amid fears of another housing “bubble” and a “dangerous build-up” of household debt.

The body said the Bank of England could put the brakes on house price growth with measures such as imposing a ceiling on the amounts of money banks were allowed to lend.

The Bank could also could put caps on the terms of mortgages, the amount people could borrow in relation to their deposit or the sum they could borrow in relation to their income.

The Edinburgh Solicitors Property Centre (ESPC), the body which sells most homes in Edinburgh, warned that a blanket approach would distort the housing market.

It also said restrictions on mortgage lending would favour the rich who needed to borrow the least.

The Rics proposal comes days after its latest survey showed increasing prices and buyer demand had driven up the number of homes for sale in Scotland.

But the Office for National Statistics reported last month that Scotland had missed out on a mini-bubble in the UK housing market over the first half of the year. Prices overall increased by 3.1 per cent, but those in Scotland dipped by 0.9 per cent.

Rics said the Bank of England should consider limiting yearly house price inflation to 5 per cent to take the “froth” out of any future booms.

It said that such a clear message from the bank’s financial policy committee, which underpins stability, would restrict any over-the-top price expectations from sellers.

Rics said the move would also discourage buyers from taking on too much debt due to fear of missing out on a house price boom.

Fears have been raised that a recent surge in housing market activity will result in borrowers over-stretching themselves. The Halifax reported last week that house prices were 5.4 per cent higher than last summer and Rics said 40 per cent of surveyors have seen house prices rise – the highest proportion in almost seven years.

Bank of England governor Mark Carney has said the institution is “acutely aware” of the potential threats, and action will be taken to clamp down on mortgage lending if needed.

Rics said a similar scheme had been used in Canada, where Mr Carney was governor of the Bank of Canada.

Rics Scotland director Sarah Speirs said: “Our latest survey shows continued improvement in the Scottish housing market. The buyers are out there and prices are on the up.

“However, what we don’t wish to see is prices rise to such an extent that they become unsustainable. For the market to work properly, it’s vital property is both accessible and affordable, and introducing capping may be one method of reducing risk within the sector.

“The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases.

“We believe firmly anchored house price expectations would limit excessive risk-taking.”

Rics said the number of homes on the market is not enough to keep up with the “sheer weight of demand”, which is also putting an upward pressure on prices.

ESPC, whose members sell 85 per cent of homes in the capital, said the Rics plan would have major disadvantages.

David Marshall, its business analyst, said: “There are a number of practical difficulties with attempting to set a target or limit for house price inflation, not the least of which is that house price trends can vary substantially even within relatively small geographical areas.

“The aim of avoiding excessive or unsustainable levels of inflation is certainly admirable, but this is probably best addressed by ensuring the supply of housing – in particular affordable housing – is sufficient to meet levels of demand.”