Proposals are part of wider plans to rebalance the UK economy away from finance
UK house prices should be frozen for five years to help prevent another financial crisis, the think tank IPPR has said.
The group has urged the Bank of England to freeze property prices under a separate new inflation target and said this could lead to house prices falling by around 10 per cent in real terms as other prices and wages continue to rise, making homes more affordable.
Under the IPPR’s proposals, house prices would be allowed to increase “only after expectations of constantly rising house prices have been ‘reset’”. The think tank also said prices would be allowed to grow “no faster than the general consumer price inflation target of 2 per cent, meaning no further growth in the real value of people’s homes”.
The IPPR said its recommendations were part of a wider plan to “rebalance the UK economy away from finance” so as to avoid another financial crisis.
According to the IPPR, the financial sector’s “dominance” since the 1980s has contributed to a strong pound, which has hurt exporters, and has attracted surplus money from other countries, which has been channelled into loans for speculative investors, including mortgage lending.
This speculation over house prices, the think tank said, has helped drive up prices and at the same time made the economy more vulnerable to a crisis, because it has reduced funds available for more productive investment, created regional inequalities with disproportionate growth in London and the South East, and “concentrated market power into the hands of a small number of large banks”.
Other proposals made by the IPPR include a new financial transactions tax on currency trading, abolish the corporation tax surcharge on banks and instead raise the current bank levy on banks’ and shadow banks’ global balance sheets.
The think tank also wants to introduce wider measures to improve transparency and reduce the volume of illicit capital flowing into the UK’s financial system.
Grace Blakeley, IPPR research fellow, 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.”
Ms Blakeley said the UK’s manufacturing and knowledge-based industries should then be built up over the long term, while the significance of the finance sector to the economy is reduced, “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,” she added.