Keep a tough line on mortgage lending criteria, urges thinktank

Banks should keep their tough mortgage lending criteria in place to help prevent another house price bubble building up in the future, a thinktank said.

Mortgages should be capped at 90 per cent of a property’s value, while people should also be prevented from borrowing more than 3.5 times their income, according to the Institute for Public Policy Research (IPPR).

The group said the UK had had four housing bubbles in the past 40 years, with these causing widespread damage to the econ- omy.

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It blamed the most recent house price boom, which saw property values treble between 1996 and 2006, on loose mortgage lending, pointing out that before the credit crunch the UK had the highest average loan-to-value ratio out of all OECD countries, apart from the Netherlands.

The UK also has the highest level of mortgage lending as a percentage of GDP at 81 per cent, compared with 73 per cent in the US and 44 per cent across Western Europe.

The group said that although the country had a long-term under-supply of housing, the availability of cheap credit exacerbated volatility in the property market.

It also warned that the country’s “addiction” to house price inflation was bad for the economy, and it said the Government should make greater house price stability a “central plank” of its economic policy.

Nick Pearce, IPPR director, said: “A central plank of economic policy should be to target moderate increases in house prices, rather than allowing runaway house price inflation which is always damaging in the long run.

“The Housing Minister, Grant Shapps, has tentatively floated the idea of aiming for house price stability but he and (Chancellor) George Osborne should go further and make it an explicit policy objective.”