Avoiding A Bubble: Can It Be Done?
Updated: 1:11pm UK, Friday 13 September 2013
Proposals for policymakers in the UK to restrict property market growth are not without international precedent.
In governor of the Bank of England Mark Carney's native Canada and New Zealand, governments have imposed a system of checks to prevent housing bubbles occurring.
In August, alarmed by rapid house price growth that saw property values in Auckland swell by an annual average of 8.6%, New Zealand's Reserve Bank moved to impose a long–threatened raft of measures designed to cool the market.
From October 1 this year, the Reserve Bank said, banks would have to ensure that a maximum of 10% of their loan book was comprised by mortgages exceeding 80% of the property value.
Reserve Bank Governor Graeme Wheeler said this high loans-to-value ratio (LVR) was the most powerful tool at the bank's disposal for bringing the market under control.
He said: "The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy."
In Canada, policymakers have made repeated efforts since 2009 to artificially slow the housing market after a prolonged period of low borrowing costs saw prices rise steeply and household debt levels increase correspondingly.
Measures have included shortening the maximum period over which a mortgage can be repaid from 30 years to 25 years and reducing the lending cap from 85% of the total property value to 80%.
"These government changes have been introduced to ensure that the housing market in Canada continues to be stable, as well as to encourage Canadians to avoid overextending themselves financially," a statement from the Royal Bank of Canada said.
Mortgage lending rules were tightened four times before the Canadian housing market slowed in July, 2012, but prices have since bounced back and appeared to stabilise.
Figures published by Statistics Canada on Thursday said its national house price index had seen an increase of some 1.9% on the previous year and 0.2% on the previous month.
Mazen Issa, economist at TD Securities, said it was unlikely the market would overheat in the coming months as house prices were now markedly less affordable than they had been previously.
"We do not see a strong case for rampant home price appreciation over the medium-term as the backup in mortgage rates will erode affordability," he said.
"Moreover, sales activity is likely to slow as household balance sheets are stretched and the increase in home prices may have priced-out potential home buyers."
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