Bank warns on house prices

THE Bank of England today rang fresh alarm bells over the housing market, warning that property prices are more likely to go down than up in coming months.

In the Bank's first comments on housing this year, monetary policy committee member Kate Barker said the outlook for property prices and its potential impact on household spending remained one of the major issues confronting the MPC.

'Pretending to have any degree of confidence in predicting asset prices is notoriously foolish. But in view of the evidence on affordability, and the balance of arguments about overvaluation, the likelihood of some decline in house prices, at least relative to earnings, seems now to be much greater than that of a further significant increase,' Barker said.

The comments, in a speech to the Institute for Economic Affairs, follow recent signs that house prices are already falling. Building society Nationwide said prices dipped 0.2% in December, pulling the year-on-year rate of increase down to 12.7% - its weakest for nearly three years. Halifax, Britain's biggest mortgage lender, said October saw the biggest price drop for four years.

But Barker said there was a 'plausible case' that any falls in house prices would not hit household spending as hard as they had in the past. She explained that the recent boom had been driven by a variety of factors, not just unrealistic income expectations as in past booms.

Barker said the weakness of the dollar had become the MPC's main concern. 'The housing market is far from being the dominant issue. It is perhaps not even the most important asset price, in the light of the significant decline in the dollar's effective rate in the fourth quarter of last year,' she said.