Governor warns of house price slowdown and rate rise

13 April 2012

Britain's booming property market may finally be cooling off after a period of frenzied gains, the country's most influential banker has claimed.

But Bank of England Governor Mervyn King warned that homeowners still face the prospect of higher interest rates because of the looming threat of inflation.

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Mr King told a committee of MPs that a combination of rapid immigration, historically low interest rates and lack of supply had sustained much higher' house values in recent years.

After three rate rises there are now signs the market is beginning to slow'. A large fall' in the property market can't be entirely ruled out, he warned.

Yet the Bank's Monetary Policy Committee is still likely to lift borrowing costs further in order to keep a grip on inflation, Mr King told the Treasury Select Committee.

He said: "Consumer spending growth has been volatile - at least as recorded in the official data - and there are now some signs that the housing market is beginning to slow.

"The committee will continue to monitor carefully the risks to inflation as they unfold and it remains ready to take whatever action might be necessary to keep inflation on track to hit the target."

Mr King's words will come as a fresh blow to the country's 18 million homeowners, who are already grappling with borrowing costs that have reached a six-year high.

Another rise - the fourth in less than a year - would push many homebuyers over the brink.

Mortgage interest payments have jumped 22 per cent in the past year, placing a massive burden on many families.

House prices have soared 205 per cent over the past decade. Some economists have been counting on a property downturn to take the pressure off the Bank to tighten monetary policy further.

But with retail price inflation at a 16-year high, Mr King indicated he is unwilling to take any chances.

He claimed the risks to inflation are still to the upside' despite the prospect of cuts to gas and electricity bills.

Economist Howard Archer at Global Insight said: "The Bank of England's statement to parliament and the individual comments by MPC members reinforce our belief that the central bank is not yet done with raising interest rates.

"An interest rate hike in April is far from inconceivable although we believe that May is more likely."

Mr King refused to be drawn on whether home values are on the brink of a slump, saying people who have predicted declines in prices have been proved wrong in recent years.'

He distanced himself from the International Monetary Fund, which last month warned the UK property market is overvalued' and could be headed for a major slump.

It would take a major shock to the economy, such as a major leap in long-term borrowing costs, to provoke a major decline in home prices, Mr King told MPs.

Borrowers would probably be able to weather relatively modest' falls in the value of their homes without too much trouble.

But Mr King said: "If there was to be a very large fall in house prices, which I think all of us think is unlikely - but no one can rule out entirely - then the problem is much more severe."

The Bank is relatively sanguine about heavy debt load that many British families have taken on, saying that mortgage arrears remain relatively low.

But Mr King said unsecured debts are a worry, and that the recent slowdown in credit-card lending has been welcome.

"There has been a very significant fall in the rate of growth of credit card borrowing. I think to be honest that is probably a welcome development.

"It is in the unsecured market where we have seen the problems of personal debt." Worries about the US housing market have helped provoke convulsions in world financial markets in recent weeks.

Mr King warned that the danger of further stock market turmoil remains all too real, despite a spell of relative calm in recent days.

He said: "It is too early to say whether the period of greater volatility is over."

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