The Royal Institution of Chartered Surveyors, RICS, has called for the Bank of England to place a 5% cap on annual house price inflation to avoid another house price bubble.

There is worry that unless a cap is placed on inflation, the UK housing economy could be at risk of forming a “dangerous” debt bubble. The rapid increase in house prices also calls into question the government’s plans to extend their ”help to buy” scheme.

Joshua Miller, senior economist at RICS said that a

“… cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise.”

The idea is to set a measure to help prevent a house price bubble ahead of time and curb the enthusiasm of the public and the banking sector. Mr Miller states:

“We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt.”

RICS believe the Bank of England’s Financial Policy Committee, FPC, now has the tools to intervene in the housing marketing to force banks to limit reckless lending and “take the froth out of future housing market booms”.

The cap would not affect buyer / seller transactions. That is to say if you were selling your house at a profit equal to more than the 5% mark that would be ok. The cap is intended to deter banks from issuing risky loans.

Some would argue that the problem has more to do with demand for houses far outstripping supply. With so many people looking for houses and so few available the prices will naturally soar. Sir Howard Davies, former deputy governor for the Bank of England stated that:

“The problem is that we are not building enough homes”

In addition, Mark Carney, the current Bank of England Governor, rejected the idea of a current boom in the housing market as its performance across the country varies greatly.

He has a point. According to a recent Halifax survey house prices in the UK had risen by 5.4% over the last year. However, figures from the Office for National Statistics show that if you exclude London and the South East UK house prices only increased by 1% in the year up to June.

In fact the BBC website shows that house prices in the North West taken between January and March 2013 only show an annual rise of 0.9%. For the same period Merseyside actually went down by -1.4%.

So there is fear that caps on the market could stifle growth in other regions. There is also speculation that restriction in access to mortgages could also damage the long overdue recovery in the wider economy.

Adding more fuel to fire, leading UK property website, Rightmove, announced this morning that it is tripling its forecast for house prices this year. At the start of the year Rightmove predicted a 2% increase in asking prices for houses. They have now revised that figure to 6%.

This adds to the pressure on the FPC who will meet on Wednesday to debate the potential of a house price bubble and what action should be taken.

Should a 5% cap be imposed on annual house price appreciation? Will such a measure protect the public from over-extending themselves just to get on the property ladder? Or will it just make it even more impossible for first time buyers to get started?

For more information see:

Bank of England must limit house price booms, says Rics

Bank of England urged to cap house price rises at 5% over fears of ‘dangerous’ debt bubble