The Bank of England should use its powers to limit house price increases to 5% a year to “take the froth out” of price booms, a surveyors’ group says.

The Royal Institution of Chartered Surveyors (Rics) said that a 5% annual rise should trigger caps on how much people could borrow relative to their incomes or the value of the property.

It is not suggesting that sellers should face a limit on how much they could charge for their homes.

The Bank said it was being vigilant.

Activity in the UK housing market has picked up in recent months after a few years of inactivity during the financial crisis.

There has been considerable debate during the week about the future of the UK housing market and the potential for government schemes to create an artificial price bubble.

Some forecasters are suggesting increases in house prices could break through the 5% barrier this year, owing to increasing demand from first-time buyers at a time when the number of homes for sale remains low.

‘Firmly anchored expectations’

Joshua Miller, senior economist at Rics, said that it was important to stop any debt-fuelled house price advance.

“The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases. Capping price growth at, say, 5% is one way of doing this,” he said.

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

Jon Pishiri, house prices commented:

Continually rising house prices have led to expectations by many that growth can exceed sustainable levels. As the last RICS residential market survey showed prices are expected to continue to rise in the capital, and such a cap, imposed through lending criteria, would prevent the public taking on unmanageable levels of debt, as well as helping potential buyers to find a suitable home within their budget.

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