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'Build more homes' to prevent housing bubble

Leading economists believe the best way to avoid a housing bubble in the UK is to build more homes.The construction of new homes was by far the most popular response from economists in the Financial Times' annual poll of economists.Charles Davis of the Centre for Economics and Business Research said: "The simple, crucial fact is that there remains a massive, basic discrepancy between the demand and new supply of homes in the UK. Until that is solved there is likely to be a real appreciation of bricks and mortar, especially while monetary policy is still as loose as it is."Some of those surveyed believed the Bank of England’s Financial Policy Committee should address the issue by limiting loan-to-value ratios or keeping a tighter grip on lending standards.Several, however, believed such measures would prove ineffective and that only an increase in interest rates would prevent the housing market from overheating.Opinion remains divided as to whether a housing bubble is developing in the UK. Some respondents, such as David Kern of the British Chambers of Commerce, claimed fears of an overheating market are currently unjustified. Others, such as Rob Wood of Berenberg Bank, said a problem had already developed.A major problem identified by some respondents is the existence of several housing markets within the UK, which means a bubble could develop in London and the south-east but not in the rest of the country. According to Professor Nicholas Barr of the London School of Economics, London forms part of a global market and policies designed to control prices in the rest of the country may not be effective in the capital.In December, Halifax played down fears of a house price bubble in its outlook for the UK housing market in 2014. According to the bank, several factors would act as constraints on demand, including slow growth in earnings and increased construction. The market would become more balanced, with price rises in the regions beginning to match those in London.  

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