House price bubble 'will not burst'

FEARS that the housing market 'bubble' could be about to burst have been dismissed by the deputy governor of the Bank of England. David Clementi assured homeowners that the booming property market was unlikely to crash and that there was no threat of an imminent rise in interest rates.

Interest rates have been held at 4% since November and analysts have forecast a rise to rein back consumer spending and the housing market. Last week the Organisation for Economic Co- operation and Development also predicted rate rises would be needed within weeks to keep inflation under control.

But on Monday Clementi insisted that the situation would not lead to a 1990s-style crisis and did not warrant a rise in interest rates. 'As with all imbalances, this situation will have to be resolved,' he said. 'But this need not necessarily involve a sharp correction in property prices.

'On balance, my view is that the current state of the housing market does not, taken on its own, raise undue concerns for the inflation outlook.

'But we need to, and will, stay alert to developments in the data. And both we, and the markets, need to recognise that the build-up in debt creates heightened downside risks.'

Earlier this month economic forecasters predicted the average house price in Britain could triple to more than £300,000 by 2020. They claimed the market would be driven by a desperate shortage of homes, low interest rates and a surge in population partly due to immigration.

The predictions from experts at the Centre for Economics & Business Research were that the North-South gap in prices would also become wider still.

In a speech to the Chartered Surveyors Livery Company's international dinner on Monday night, Clementi said the Halifax and Nationwide had suggested annual house price inflation is currently running at levels in the mid-teens. He also said the Royal Institution of Chartered Surveyors had pointed to continuing strength in house price inflation over the next few months. 'There are some who believe the MPC (Monetary Policy Committee) should act now to contain what they perceive to be a dangerous 'bubble' in house prices. I am not convinced by this view,' he added.

Clementi claimed that while residential house price inflation could clearly not be sustained for ever at current rates, the evidence for a bubble was not conclusive. 'By their very nature, bubbles are hard for policy-makers to identify, particularly at the time...Even if the property market gets out of line, monetary policy adjustment is appropriate only to the extent that property developments risk the inflation target not being met.'