A leading think tank has called for the Bank of England to trigger an artificial house price crash to help rebalance the economy.
The IPPR (Institute for Public Policy Research) said setting a target of zero for house price inflation would help prevent another financial crisis.
It is calling for the Bank o aim for a five-year price freeze, by measures including tougher restrictions on how much people can borrow relative to their income, insisting on higher initial deposits and other steps to control credit in the property markets.
The Institute claims this could mean house prices falling by around 10 per cent in real terms, as other prices and wages continue to rise, making homes more affordable. Only after expectations of constantly rising hose prices have been "reset" would they be allowed to increase again, the think tank said in a report. However they would not be allowed to rise faster than the general consumer price inflation target of two per cent, meaning an end to growth in the real value of people's homes.
The study says the policies should be accompanied by increased investment in house building, but warns that this alone will not be enough to rein in house price inflation.
The call is part of a wider report On Borrowed Time which sets out a plan to rebalance the UK economy away from its dependency on the finance sector, warning that speculation over house prices and related securities has contributed to their 10-fold increase between 1980 and 2008, and increased the economy’s vulnerability to financial crises.
Grace Blakeley, IPPR research fellow and author of the discussion paper, said: “Since the 1980s, the UK’s business model has rested on attracting capital from the rest of the world, which it has channelled into debt for UK consumers. The 2008 crisis proved that this is unsustainable.
"We need to move towards a more sustainable growth model, one built on production and investment rather than debt and speculation. To do this, we must break the cycle of ever-rising house prices driving property speculation, crowding out investment in the real economy.
“Over the longer term, we should build up our manufacturing and knowledge-based industries and reduce the significance of our finance sector to the economy, including by curbing its worst speculative excesses.
"We argue for sweeping reforms to taxation of the financial sector, including the introduction of a financial transactions tax on currency trading, combined with an industrial strategy focused on boosting the UK’s exporting sectors.”
The report is one of a series from the IPPR’s Commission on Economic Justice, leading up to a final report in the autumn which will propose fundamental and wide-ranging reforms of the UK economy.
Other steps proposed in the report include a new financial transactions tax on currency trading, with a higher rate imposed on speculative capital flows and measures to improve transparency and reduce the volume of illicit capital flowing into the UK’s financial system.
The Bank of England is widely expected to be planning an interest rate hike in August, but many commentators argue that this would damage the already sluggish growth in the economy.
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