Berenberg Bank economist Rob Wood said the Financial Policy Committee could tighten lending standards for example, by pushing lenders to make borrower stress tests more difficult, or recommend cancelling or curtailing the Help to Buy housing subsidy when it is reviewed next September.
According to The Telegraph, civil servants are floating plans to halve the Help to Buy scheme loan cap if the London housing market threatens to overheat. If the maximum loan was reduced to £300,000, borrowers in the South East and London could be effectively excluded from the scheme.
“If you lowered the cap to £300,000 that would cut out most of London,” the Whitehall source said.
“It would make sure that the places in the UK that need it like the North East and North West still benefit from Help to Buy. It would make it a more regionally focused scheme.”
However, Wood said any tactics the FPC or government enlist are unlikely to quash house price inflation forever and will only “buy the MPC time.”
He added: “Ultimately, the blunt force instrument of interest rates will be needed.”
The bank predicted Bank Base Rate could rise as early as Q1 2015 due to strong growth and falling unemployment figures.
The bank’s chief UK economist said he expected rates to rise earlier than the Bank is currently signalling.
Unemployment should reach the 7% threshold by mid-2014, but Wood added the first rate hike could come as early as Q1 in 2015. A general election in 2015 shouldn’t stop the Bank from changing policy but the hurdle for raising rates is likely to be higher in April, May or June, he said.
“If it does not move in Q1 2015, the BoE may want to wait until the summer. That being said, a rate rise a month before an election would be a strong statement of independence.”
House prices will rise dramatically next year, in part driven by low interest rates to produce a 10% overall rise.
“This surge in the housing market is being driven by very low mortgage interest rates and falling uncertainty. Next year it will likely be supported by gradually rising real incomes too,” he said.
The UK’s biggest mortgage lender Halifax predicted a more conservative 4 – 8% house price rise over 2014, with pressures on household finances, greater housing supply and the end of the FLS holding back the market.
