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Bursting Bubbles

Is this the solution to property bubbles?

The Reform Alliance reckon it has housing bubbles licked.

THE REFORM ALLIANCE has released a new mortgage policy which it claims will protect the housing market from overheating in the future.

The RA says that the steps in its Fair Value Lending policy can prevent the return of a property bubble, stabilise property prices and make property more available for first time buyers.

The policy rests on an attempt to “address speculative behaviour by reasserting the link between property prices and mortgage size.”

The method they suggest uses average national income to dictate the fair value of a property, and then limits the amount that a bank can lend out to 90 per cent of that fair value.

By using this technique, the RA say that volatility and rapidly escalating house prices can be worked out of the property market.

They point to data from both the UK and Ireland that show the price-to-earnings ratio spiked prior to property crashes in the UK in 1983 and 2008 and before our own crash in 2008.

Reaction to the policy has so far been mixed, with some elements of the policy being welcomed while the link to the national average wage for price setting has attracted criticism.


The RA also cite a 2011 IMF report that found that the higher the average loan to value ratio in the wider property market, the more sensitive economic performance is to house price movement.

Do you think this would help stave off future housing market overheating?

Poll Results:

No (1116)
Don't know (698)
Yes (690)

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