Bank alert on house prices

The Bank of England today issued a stark warning that house prices could collapse because the current red-hot pace of price gains is unsustainable.

David Clementi, the Bank's Deputy Governor in charge of financial stability, told MPs on the influential Treasury Select Committee: "The level of house price inflation is unsustainable and the longer it goes on for, the sharper is likely to be the eventual adjustment."

He said both homebuyers and lenders should exercise caution in agreeing large mortgages, which may prove difficult to repay.

His boss, Governor Sir Edward George, soothed fears that Britain's housing market is heading for a devastating Nineties-style boom and bust. Sir Edward agreed that the housing market was "unsustainably strong" but said there was little that the Bank could do to cool it.

He said: "We're not expecting a boom-bust in the housing market. We've made it very clear that if consumption growth continues at its current rate, fuelled in part by house prices, we would act to moderate it. But we can't, and wouldn't, pick out the housing market by itself."

The Bank's remit, as set out by Gordon Brown, is to keep inflation at 2.5 per cent, rather than to target specific parts of the economy. With the Bank's hands tied, some are calling on the Chancellor to take some of the heat out of the market through targeted tax measures such as increasing stamp duty.

Latest figures from Halifax, Britain's biggest mortgage lender, showed house prices surged by a record 4.2 per cent in May. With the price of an average home now standing at £107,152, that equates to a rise of £140 a day.

London's housing boom has gone into overdrive in the past few months, and some experts predict the annual rate of increase will burst through the 20 per cent barrier.

But despite ruling out specific action to take some steam out of the housing boom, Sir Edward warned that the Bank would have "no option" but to raise interest rates if consumer spending does not slow.

The cost of borrowing has been at a 38-year low of four per cent since last November. The City is predicting a five per cent rate by the end of the year.

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