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pms laflame at aaahawk.com
Fri Jun 14 20:30:36 PDT 2002


Bank warns UK house prices not sustainable By Scheherazade Daneshkhu, Economics Correspondent Published: June 13 2002 12:51 | Last Updated: June 13 2002 20:51

The Bank of England on Thursday warned homebuyers to exercise caution in taking on debt and said the growth in house prices was "unsustainable".

If necessary, it said, it would raise interest rates to take the heat out of the housing market. Sir Edward George, governor, told a Commons committee that the Bank would have "no option" but to raise its prime interest rate from its 38-year low of 4 per cent if rising house prices threatened to push up inflation.

"We have got to be clear that if consumer growth continues at its recent rate, driven in part by house prices, we would have to act to moderate that. I think that is as clear a signal as I can give," he said.

Sir Edward's comments contributed to a fall in share prices, with the benchmark FTSE 100 share index sliding 79.8 points to end at 4,771.9, its lowest close since September 27, when the market was still reeling from the shock of September 11. Sir Edward also said the Bank would be prepared to give its own verdict on the government's five tests for euro entry.

Sir Edward and four other members of the Bank's interest rate-setting Monetary Policy Committee were giving evidence to an all-party parliamentary committee on the Bank's quarterly inflation report, published last month.

David Clementi, one of the bank's two deputy governors, warned both lenders and borrowers to "exercise caution" especially since the rate of house price growth had accelerated in recent months instead of moderating as expected.

"The longer it goes on, the sharper is likely to be the final adjustment," he said. He was also concerned about the rapid growth in the level of household credit.

Prices in the futures market suggested that investors believe there is a roughly even chance that interest rates will rise next month and that the Bank's prime rate will end the year at 4.75 per cent.

Halifax, Britain's largest mortgage lender, said this month that a 4.2 per cent leap in house prices in May from April was a record unmatched even at the height of the late 1980s property boom.

The tone of Mr Clementi's remarks contrasted with those he made in April when he thought the state of the housing market did not "raise undue concerns" for the inflation outlook and said he took "some comfort" from the ratio of house prices to earnings being below 1980s levels.

Some economists have been critical of the Bank's decision to leave interest rates on hold, arguing that it has underestimated inflationary pressures.

Kate Barker, another member of the MPC, conceded that low interest rates had been one factor underpinning the strong housing market.

Pressure to raise interest rates would also come if demand picked up due to an improving international economy without a fall in consumer spending.

One reason for the bank's reluctance to raise interest rates has been the poor performance of the economy, which stagnated for six months, according to official figures.



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