House prices to rise for years, says BoE's David Miles – Telegraph.co.uk

David Miles, one of the Bank’s nine rate-setters, said in an official paper that the desire for space caused by the UK’s rising population would reinforce planning restrictions and make it more difficult for housebuilders to keep up with demand. As a result, he said: “We should anticipate a rising trajectory for real house prices over the longer term.

“This is particularly likely in a country like the UK where population density looks set to rise relatively fast. The model also suggests that the upwards trajectory in house values may ultimately become steeper than the rise in real incomes.”

However, a housing boom would be out of reach for first time buyers, he added, because credit will remain in short supply. Before the financial crisis, buyers did not need a deposit to secure a mortgage. Since the recession, though, large deposits have become essential.

“It should not be seen as a sign of a damaged market,” Mr Miles said. “It probably never made sense for there to be 100pc mortgages. There may be no price at which it makes commercial sense for such a loan to be available.”

He added: “New homeowners in the future may need to have more equity than was normal in the years leading up to the financial crisis. This will have an impact, probably permanently, on the pattern of home-ownership.

“The first effect is likely to be for prospective buyers to postpone their purchase, while they save more to accumulate a larger deposit. As a result the average age at which people would buy their first home will rise, and the share of owner-occupied houses will fall.

“The change in the pattern of homeownership this generates can be expected to be very large if the required equity is only provided by the prospective homeowners themselves.”

To bridge the credit shortfall caused by risk-averse lenders, Mr Miles proposed a new “equity loan” product – which would act as the buyer’s deposit.

Under his plan, providers would take equity in the property in return for a larger share of the upside rather than any monthly or annual payments. He used the example of a 20pc equity loan, which would take 36pc of the increase in the value of the property.

“In exchange for taking a higher share of a capital gain on a property a provider of an equity loan might agree to receive no payments until the property is sold,” he said.

“One way in which financial institutions could provide such loans without taking on significant house price risk is to issue savings products with returns linked to house price changes, a saving product which potential home owners are likely to find particularly useful.”

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