Mortgages should be capped at 90% loan-to-value (LTV) and lending restricted according to salaries to stop another housing bubble, the Government has been warned.
The Institute for Public Policy Research (IPPR) has recommended a cap on LTVs and 'loan-to-income' ratios to help stop another housing bubble building up in the future.
The IPPR says the UK has been through four housing bubbles in the last 40 years, causing 'widespread damage to the economy'.
It is now calling on the Government to make sure that providers lend no more than 90% of a property's worth, and that people can only borrow at a maximum of three and a half times household income.
If implemented the rules would mean, for example, that a mortgage of no more than £90,000 could be lent to buy a home worth £100,000 and a couple each earning £25,000 could borrow no more than £175,000.
In recent months some lenders have begun to offer products at higher LTV levels, with a few even reintroducing mortgages for buyers with 5% deposits.
If the IPPR recommendations were passed, such products would disappear from the market altogether.
But, surprisingly, a recent YouGov poll from Shelter found that first-time buyers support stronger mortgage regulation despite the fact it will stop some people getting a mortgage.
"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," said Nick Pearce, IPPR director.
"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.
"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."
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