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
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
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.