IPPR also wants more controls on buy-to-let lending to stop property speculators feeding runaway housing market
Homebuyers should be legally required to put down a minimum 10% deposit and borrow no more than three and a half times their income to purchase a property if Britain is to avoid another damaging boom-bust cycle, according to a report by the Institute for Public Policy Research (IPPR).
Today's report by the thinktank also argues for controls on buy-to-let lending to deter property speculators from ramping up the market.
The report sets the IPPR against most of the mortgage industry, which is campaigning for the Financial Services Authority to use "affordability" tests rather than formal caps on loan-to-value and loan-to-income. The FSA will be issuing a consultation paper this summer as part of its Mortgage Market Review, but so far it has stated that it believes LTV caps would be "too blunt a tool" to impose on lenders.
The IPPR said that easy lending practices by British banks before the onset of the credit crunch had left UK households with bigger mortgages, relative to their income, than in any other major economy.
"Almost all of the increase in household indebtedness in the UK has been as a result of more mortgage borrowing. At the end of 2009, the UK household sector had debts totalling £1.53 trillion, of which £1.19 trillion (78%) was secured on dwellings."
The UK has the highest levels of mortgage lending as a percentage of GDP – 81% – higher than the US (73%), Canada (49%) and western Europe (44%) – as well as the highest levels of household and business debt relative to GDP.
IPPR director Nick Pearce said: "Britain has suffered four housing bubbles in the last 40 years, each of which contributed to major economic and social problems.
"We must learn the lessons from this economic history. A central plank of economic policy should be to target moderate increases in house prices, rather than allowing runaway house price inflation which is always damaging in the long run.
"The housing minister, Grant Shapps, has tentatively floated the idea of aiming for house price stability but he and George Osborne should go further and make it an explicit policy objective. We need tougher mortgage market regulation from the FSA, especially caps on 'loan-to-value' and 'loan-to-income' ratios."
According to campaigning group Shelter, first time buyers back tighter rules on lending despite the fact it will stop some people getting a mortgage.
In a YouGov poll, commissioned by Shelter, 75% of potential buyers said the banks must be forced to behave more responsibly. Four out of 10 said they did not believe that the banks could be trusted to lend responsibly in the future, and nearly a third (28%) said they had been offered a bigger mortgage than they had asked for, or knew someone who had.
Campbell Robb, chief executive of Shelter, said: "People really want simple, commonsense rules in place to ensure people borrow money responsibly. What is most striking is the level of support among first time buyers who clearly want greater protection and are well aware it might limit their chances of getting mortgage credit in the future.
"So far the voice of the consumer has been completely drowned out by the mortgage industry. We must not let banks go back to the old ways of irresponsible and reckless lending."
The IPPR report is among the first to call for stricter regulation of the resurgent buy-to-let industry. It said deposit requirements on buy-to-let mortgages should be raised and lenders should ensure that rents cover repayments.
It said: "IPPR wants to deter small time speculators from seeking excessive capital gains from the buy-to-let market, since this activity feeds housing bubbles.
"The UK has the lowest level of institutional investment in private rented housing in Europe. We should be encouraging institutional investors to 'build-to-let' while discouraging individual property speculators using buy-to-let mortgages which can artificially inflate our housing market."