Do policymakers need to cool the UK housing market?

The combination of government schemes and a recovery in the wider economy underpinned a robust pickup in housing transactions and house prices through 2013. But there is no evidence of a housing bubble across most of the country. Across the majority of regions prices are still below previous peaks in nominal terms and much lower still in real terms. Meanwhile measures of affordability and indebtedness are in a much better state than they were prior to the financial crisis. The exception is London, where supply shortages and strong demand have pushed both the price‐to‐income ratio and average income multiple back to previous highs. An improving macroeconomic backdrop and ongoing support from Help to Buy should ensure that demand continues to strengthen, supporting further growth in transactions. There has been a strong supply response over the past nine months and this should continue, which will help to keep a lid on price growth. Divergent macroeconomic prospects across the regions will lead to a wide variation in house price growth, with London expected to lead the way. We do not see a case for changing the terms of Help to Buy, particularly given that the most likely source of a bubble is London, where the impact of Help to Buy is likely to be small. In our view, the average income multiple is crucial and macro prudential tools should be used if it continues to rise above previous peaks in any regions. The most likely cause of a bubble at the national level would be an inadequate supply response. Alongside its policies to support demand, the government should implement a series of measures aimed at increasing supply, including planning reform, and it could also consider using its low borrowing costs to fund public sector house building.