We propose an
instrument for property price damping,
to prevent house price
investment in home energy efficiency
will be a side effect.
In the UK, Euro zone
and other currency areas, a Central Bank sets a single interest rate
to control all forms of inflation, including property prices. This crude
instrument is only effective if if all parts of the currency zone are at the
same stage in their economic cycle.
Buildings are different to
other personal assets in that they have a fixed position.
We describe a financial instrument that exploits the fixed position of buildings to
shift property price control back to local level without undermining
Central Bank authority.
Energy saving bonus:
Predictable long term house prices would reduce the financial risks of investing
in home energy improvements.
energy prize on offer
United Kingdom, approximately one third of our CO2 emissions are
produced running our homes. Useful reductions in home energy efficiency can be
achieved at relatively low cost by simple measures such as blocking drafts and
But moving towards carbon neutral homes requires major refurbishments such as
installing triple glazing, modern boilers and solar powered water heating units.
Owner-occupiers need to have a high level of confidence in the long term (20 Ė
25 years) stability of house prices if they are to be persuaded to take out
large loans to pay for expensive energy saving improvements. This confidence is
currently lacking because after a long period when international house price
inflation has exceeded general inflation, the banking crisis has produced a
downturn in house prices.
the system will work
refer to the British market but a similar system could be developed for other
How the Bank of England currently controls inflation
of England is responsible for setting the Bank Rate at a level which keeps
national inflation within limits set by the government.
It has to use a single Bank Rate to cover the whole of the UK and all types of
So when a housing price bubble emerges in one part of the country, say the
South East of England, it cannot be suppressed by increasing the Bank Rate
without threatening the growth of whole of the UK economy
propose the introduction of a Surcharge Interest
Rate (SIR) which is only used to suppress excessive house price inflation.
This rate can be fine tuned on a post code basis to meet local needs.
SIR politically acceptable
Mortgage payers would not lose the additional interest payments they make, but
the money would be locked away in a savings account for up to twenty five years.
To enforce this, anyone taking out a mortgage to purchase a property would also have to open a
Bonded Savings Account.
could be paid into this account at any time but unless the account holder fell
upon exceptionally hard times, money could not be withdrawn until the mortgage
had been re-paid.
If house price inflation shows signs of outpacing general inflation, the Bank
of England would have the power to impose a Surcharge Interest Rate on
This SIR payment would be made into the Bonded Savings Account.
on house prices
The payment of an effectively higher interest rate would take the heat out of
the housing market, suppressing house price inflation.
In order to give the instrument bite, the SIR could be significantly (painfully)
higher than the prevailing bank rate.
Minimising the financial burden for owner-occupiers
Owner-occupiers only bring the threat of inflation into the housing market at the time
they are negotiating a price, so long standing mortgagees would not have to pay the
The system would be backdated by (say) three months, to prevent speculative buying, in
anticipation of a pending Surcharge Interest Rate rise. For example, if you take
your mortgage out in October and the SIR increases in December, then you will
have to make the SIR payments from December onwards.
Buy to let
Affluent people who
borrow money to buy properties for letting purposes do not contribute to the
housing stock, but they add to the pressures on the housing market for as
long as they possess a property. To partially redress this imbalance such
borrowers would be subject to the current SIR
the life of their mortgage.
Focusing on housing inflation hot spots
could vary at post code levels because irrespective of where the mortgage is
taken out, the location the property remains fixed. So, if you take your
mortgage out in Bradford, but buy in London, you pay London SIR rates.
local SIR had returned to a zero the cycle would start up again, with the most
recent batch of SIR payers being freed from future payment obligations.
local targeting of Surcharge Interest Rates would allow relatively large rates
to be imposed without distorting the wider financial markets.
the SIR mechanism is a psychological confidence building measure. Its presence will assure the
markets that in the long term, house prices will keep in step with general
inflation. This will reduce the benefits of speculative buying, consequently
reducing the need for regular surcharge interest rate intervention.
SIR is not a substitute for building sufficient houses to meet house buyer
demands, but it could support the house building programme.
The funds stored in the Bonded Savings Accounts could be hypothecated. That is,
finance to support house building in areas where the demand for new homes was
highest. In particular, the funds could be used to offset the additional costs
commonly encountered when developing brown field sites. The Bank of England would have the final say on fund transfers, acting in the interest of
Bonded savings accounts for the super-rich
An alternative to
In central London especially, the super-rich help
to create housing price bubbles because they are able to pay whatever house
price the seller asks, without having to take out a mortgage loan.s
wealth and spending power creates jobs so we donít want to drive them away by
charging punitive council or mansion taxes. A variation on the bonded savings
account theme would enable them to contribute in reducing the size of
house price bubbles.
Anyone who buys a property for cash in a housing
price bubble area should be required to open a bonded savings account and be
obliged to pay in a sum proportionate to the price paid for the property each month. Their
savings plus interest would be returned when they sold the property.
The accumulated funds would be made available
for loans to developers wishing to build affordable homes in housing price
Long term benefits
Bonded savings accounts
for the the super-rich would help to pull them into the country by keeping
down the price of the most desirable properties.
Additional measures to stabilise house prices
We need reliable, reasonably priced public transport so that people can commute
from areas of relative housing plenty to the big cities where available houses
are scarce. For a solution to this problem please visit our
Transport Internet page.
inspiration for this proposal
The original version of this web page was published in June 2003 in response to
a an article in the Economist magazine. This warned of a pending world wide
crash in house prices.
1. "Castles in hot air", Special supplement, The Economist, 31 May
History has shown that the Economist was right, with the collapse
of the American sub prime housing market triggering a banking crisis and an
Here is a short extract
from the 2003 Economist article
2. Bill Courtney disagreed with the Alan Greenspan analysis and tried
to do something about it. But he was a virtually unknown aspiring inventor, so
his lobbying of politicians and the financial media came to nothing.
the Euro crisis
system would be particularly useful in large single currency territories such as
the Euro and US dollar zones, because it would decouple local control of house
price inflation from the bank rate set for the whole of the currency zone.
It's too late to solve the American sub-prime market problem but
our proposal could boost
confidence in Europe's ability to solve its current problems.
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