The Confederation of British Industry (CBI), a business lobbying group, has warned that UK policy makers need to be ready to act and prevent house prices from increasing too fast. House price inflation has reached 10% in some areas.
The CBI stated it expected the first rise in interest rates would occur in the first quarter of 2015. It argued that the government needed to act quickly to deal with the major shortage of houses in the UK, so that supply could increase at the same rate as demand. The CBI wants councils to release more land and to explore the possibility of new cities being built.
The Organisation of Economic Cooperation and Development (OECD) also highlighted the need to control house price increases in the UK. A recent OECD report said that “Monetary policy tightening should be accompanied by timely prudential measures to address the risks of excessive house price inflation”.
Borrowing in the UK has already got more difficult. At the end of April tighter rules on mortgage lending were introduced that required tougher checks on whether borrowers can afford to repay their loans. More measures may well be introduced.
The OECD stated that further action might include less access to the government’s Help to Buy programme, which provides guarantees for higher-risk mortgages in an attempt to encourage first time buyers enter the market.
Meanwhile, the UK Treasury said: “The chancellor has said we must remain vigilant in order to avoid repeating the mistakes of the past.
“This government has given the Bank of England new powers and new responsibilities to monitor risks in the economy and take action if necessary, something that did not happen before the crash.”
Prices in the housing market are determined by supply and demand. To understand market forces you can read chapter 6 in Foundations of Economics (3e). The housing market is examined specifically on page 130
What are the possible causes of house price increases in the UK? Why does it matter if house prices are rising fast?
Illustrate the effect of a) an increase in demand b) an increase in supply on house prices
What actions might a government take to slow down house price increases?