The Bank of England could be set a target for house price inflation under plans being explored by the Labour party, with tougher powers to restrict mortgage lending to close the gap between property prices and average incomes. 

The shadow housing secretary, John Healey, is considering whether, under a Labour government, the Bank should be set an explicit target following a decade of runaway growth in the property market, with the aim of tackling the housing crisis. 

Under the proposals, the Bank could be mandated to guide house price growth within levels set by the government, in the same way that the central bank is handed a target to keep general inflation at around 2%. 

Rather than using interest rates to achieve its aim, as is the case for general inflation, Labour is considering whether greater powers for the central bank’s financial policy committee, which is responsible for financial stability, could be used to curb house price growth by curtailing the availability of mortgages. 

Threadneedle Street already imposes affordability criteria on mortgages, capping loan-to-income ratios at 4.5 times earnings for all but 15% of new mortgages to stop banks from lending to consumers who might struggle to repay.  However, tougher limits could be applied if the Bank was at risk of breaching its target. 

Healey is also considering an alternative plan, to set a formal government target for house price growth – which would not include using the Bank’s powers – as a way to guide decision-making across Whitehall. 

Making changes to the Bank’s mandate would be a matter for the shadow chancellor, John McDonnell, rather than Healey.  McDonnell has been mulling ways to shake up the role and power of the central bank, including a potential productivity target. 

Labour could decide that curtailing house price inflation works better as a government policy target rather than a mandate for the Bank, but Healey is currently exploring both avenues. 

The average price of a house in the UK has risen over the past decade by almost 50% to £228,147, from the post-financial crisis low of £154,452 in March 2009.  Real wages have yet to rise above the level recorded before the crisis, pricing rising numbers of people out of the property market. 

Labour calculates that house price growth of 2% each year since 2010, instead of the actual rate of about 4%, would have kept the average price of a home at seven times the average full-time wage rather than eight times as is currently the case.  The house price to income ratio has skyrocketed: 20 years ago it was four times the average pay. 

Mounting uncertainty over Brexit has, however, dragged national house price growth down to 1.7% a year, the weakest level in six years.  Britain is also forecast to see the first annual decline in prices in 2019 since the post-crash property slump of 2011, which raises questions about how a target for house price growth would work in the current environment. 

Both Labour and the Conservatives are trying to find ways of tackling a lack of affordable homes across the country, which has pushed home ownership increasingly out of reach for millions. 

The focus has, however, typically been on boosting the supply of new homes.  While this is still central to Labour thinking, house price inflation targeting would be aimed at dealing with what it sees as an issue with the financial system fuelling excessive demand. 

Labour’s exploration of the idea comes after the centre-left IPPR thinktank called for the Bank to be set a target of zero house price growth for about five years, then a rate of about 2% thereafter.  However, the party has yet to decide on several key details that would be vital for making the plan work in practice, opening it up to criticism as it attempts to present itself as ready for government should an election be called. 

Labour has yet to work through the exact level of house price growth that would be targeted, and whether to vary the policy depending on region. 

House prices are falling in London but are racing ahead by about 4% a year in the north and Midlands.  The average value of a property in the north-east is still below the level reached before the financial crisis. 

There is also the risk that tougher restrictions on mortgages could block lower-income households from getting a foothold on the property ladder.  However, the party is also looking at reforming the help-to-buy scheme, or could move to underwrite mortgages for particular groups.