Select Committee on Treasury Written Evidence

Supplementary memorandum submitted by Mr Laurence Sanders, the Bank of Ireland Global Markets

  In response to the question from Mr Love [Q 90] relating to the use of fiscal policy measures to control house price inflation:

  In my verbal submission, I emphasised the key role of interest rates in controlling asset price inflation and referred to the excess of housing demand over supply as the root cause of house price inflation in the UK.

  The deficiency in UK housing supply was examined in detail by the Barker Review. The Review made reference to the use of fiscal measures to enhance supply. I am not a tax or house building expert and therefore do not feel competent to comment on the proposals. Based on empirical evidence, there may well be scope for using the tax system to encourage both the renovation of existing housing stock and the quality conversion of former industrial and office units into residential accommodation.

  Demand for owner occupied housing has grown in recent years due to a number of factors. These include: the relatively stable interest rate climate; the upturn in UK growth and hence personal disposable income, the increased preference for owner occupied accommodation and the significant increase in net migration, which has impacted on both the owner occupied and buy to let markets. The increase in the number of higher education students has also increased demand for rental properties. We expect all these factors to be significant drivers of the housing market over the next five years.

  There are fiscal measures can be taken to reduce housing demand. Each measure has drawbacks. The Barker Review made reference to increased council tax, but accepted this would result in an increased burden on the elderly population. An increase in stamp duty would need to be significant if it were to produce the desired impact on housing demand. The challenge with stamp duty is that its impact is greatest on the first time buyer sector. Stamp duty is also effectively a tax on labour mobility.

  Past UK experience suggests that a major fiscal initiative in respect of housing demand raises the risk of a sharp downturn in the housing market. The current US scenario clearly shows the impact of a significant downturn in the housing market on the American economy, via a series of transmission mechanisms. These include the impact of reduced housing demand on retail sales and the translation of lower consumer confidence into the equity market and hence pension fund returns. If fiscal policy is to be used as a mechanism to control asset prices, any reform should ideally be phased in over a long period in order to minimise the impact of the wider economy.

  Whatever measures are adopted the imbalance of overall housing supply and demand is likely to continue for a number of years. A prime driver is the increasing level of net migration, which we perceive to be in the region of 300,000 per annum. The impact of this factor is most pronounced in the social housing and buy to let markets, although the large number of skilled migrants has made a notable impact on the owner occupied market.

  One encouraging factor is the gradual increase in housebuiding activity in recent years, as can seen from the following table.

Dwellings Started




2000-01165,07220,286 439185,797
2001-02178,03517,292 192195,519
2002-03179,04216,342 185195,569
2003-04193,27218,771 289212,332
2004-05204,87920,665 239225,783
2005-06210,93924,166 255235,360

Dwellings Completed




2000-01152,81423,762 382176,958
2001-02153,43821,678 225175,341
2002-03164,13919,586 301184,026
2003-04171,84318,375 207190,425
2004-05183,93222,716 131206,779
2005-06188,99824,393 326213,717

  Source:  Dept of Communities and Local Government

  My view is that, in the short term, interest rates are the most appropriate instrument to control house prices, given the significant correlation between house price inflation and the overall rate of UK economic expansion. From a longer term perspective, my view is that the focus needs to be on measures which increase housing supply. These may well include fiscal measures.

March 2007

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