Bank alerts UK over slump in house prices

The first explicit warning on falling house prices has been issued by the Bank of England amid concern about the weakening condition of Britain's economy.

It marks the first occasion the Bank has taken steps to incorporate a cooling of house prices into its national economic outlook.

A combination of high interest rates and rising debt has coincided with high borrowing, leading the Bank to predict tough times for the nation's homeowners.

"House prices have on average stopped rising – they have been broadly flat over the past two months – and a slowdown in the housing market is evident in virtually all indicators," said Mervyn King, Governor of the Bank.

He cautioned the level of house prices relative to buyers' earnings was "unsustainable," adding the ratio of prices to salary was about 60 per cent higher than the long-term average.

"It may be that house prices won't fall at all, but it could be that there are modest falls for a period," he told a conference.

A dramatic crash in the market was suggested as something unlikely, because of the absence of past triggers, such as soaring unemployment, rising rates and economic decline.

However the new "downside" rating on inflation and growth coupled with uncertainty in the market, caused the Bank to play down any cause for celebration.

"This is not a time for opening bottles, it is a time for the MPC to keep it's eye firmly on the ball," enforced King.

Economists have already said the Governor's comments suggest interest rates will not be raised from 4.75 per cent, though some believe a hike is likely early next year.

Reports from the Bank by no means rule out rate rises over fears of currency depreciation, wage inflation and strong economic drive.

"These risks mean we cannot be confident of where the future path of output, inflation and hence interest rates will lie. When we say that, we mean it."

Mr King's comments coincide with a House of Lords report that exposed a "systematic and persistent error," in the forecasting record of inflation by the MPC.

The Committee was further criticised over a decline in the quality of research – despite saying that overall, it represents a "real success story" since it started in 1997.

 

21st November 2004

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