Property crash fears mount

13 April 2012

A DAY after a warning that a property price crash could destabilise the British economy, a Bank of England official admitted the housing boom was causing a major headache.

Yesterday's warning came from the International Monetary Fund. Its World Economic Outlook report identified a property bubble and talked of the 'likelihood of a sharp price correction'.

While Britain's economy has performed better than many other leading nations, 'the main risk to the outlook is the possibility of an abrupt correction in the housing market', it said.

The report said: 'The dramatic rise in residential property prices in recent years, especially in Australia, Ireland, the Netherlands, Spain and the United Kingdom has heightened concerns of an asset price bubble and thus the likelihood of a sharp price correction.

'A sharp decline in house prices can be costly for the economy. Evidence suggests that housing price declines tend to be protracted and are often associated with declines in economic activity and financial instability.'

Looking at the UK in particular, the IMF said a shortage of new homes was helping to drive up prices. It added: Some highly indebted households could be vulnerable to increases in interest rates or unemployment.'

The Bank of England has already pushed up its base rate by half of a percentage point to 4% since August in an attempt to cool the housing market and consumer borrowing. However, the increased cost of mortgages has so far failed to have an impact.

Today, as new figures showed consumers enjoyed another borrowing binge last month, Richard Lambert, a member of the Bank of England Monetary Policy Committee, said recent interest rate hikes had made little impact.

'For the MPC, perhaps the biggest domestic uncertainty now is the outlook for the housing market over the next year or two,' he said in a speech to the Institute for Public Policy Research.

'Our job is to target inflation, not asset prices, but the committee will need to explain with great care the impact that house prices can have on consumption and inflationary pressures, and how in turn that influences its policy decisions.'

The latest spending figures show that consumers piled on £7.35bn of extra debt in March - a 37% increase on a year ago.

Mortgage lending accounted for nearly £6bn of the rise, while spending on credit cards grew £484m, according to the British Bankers' Association. Both increases were much higher than in recent months.

'March saw a large rise in mortgage lending and, with consumer credit rising by more than in February, individuals' appetite for borrowing shows little sign of abating,' said director of statistics David Dooks.

Economists said today's figures increased the likelihood the MPC would lift rates at its next meeting on 6 May.

Yesterday's warning of a property price slump was dismissed as 'claptrap' by property market specialist John Wriglesworth.

He said: 'The IMF has said similar things before. The only trigger to a housing market collapse would be a rise in interest rates of 2%-3%. No economist in the whole world expects that.'

editor@thisismoney.co.uk

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