Mortgage cap urged to avert house price bubble

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 economy.

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.

The IPPR called on the Government and City regulator the Financial Services Authority not to give in to lobbying from the banking industry and to recommend caps on mortgage lending, in terms of both the amount advanced as a proportion of the value of a property and the amount lent relative to a borrower’s salary, as part of its Mortgage Market Review.

It also called for the deposits lenders require for buy-to-let properties to be increased to ensure the rental income covered mortgage repayments.

The group said such a move should help to deter “small time speculators” from looking for big gains from the buy-to-let market, which it said had fed house price bubbles in the past.