King renews house warning

JUST in case there was any doubt about Mervyn King's view of the housing market, the Bank of England governor spelled it out a second time.

His warning on property prices last week dominated the headlines and ruffled feathers in the Treasury, where Gordon Brown is keen to play down worries of a crash.

An unrepentant King banged home his message to the Treasury select committee, telling the MPs that after another year of rapid increases, 'the chances of house prices falling are greater than they were'.

He said it would not be sensible for people to assume prices would continue rising because they had done so for the past five years.

He added that the bank has not abandoned its 'gradualist' approach to raising interest rates. That led economists to predict a rise in August, with a reprieve in July after two successive increases.

So is King right to play Cassandra? Home values are being buoyed by the rude health of the labour market and a chronic shortage of decent property, particularly in the south of England. Interest rates, though edging up, show no sign of reaching the horrific levels of the early 1990s.

That said, the current rate of increase - an annual 20.4% according to Halifax's latest figures - is clearly not sustainable.

The ratio of house prices to average earnings has soared above its previous high in 1989, as our chart shows. Earlier peaks have been followed by troughs. Whether that happens again this time remains to be seen, but there are amber lights.

In its most recent survey, Halifax points to the 'increasing difficulties' facing potential first-time buyers.

A number of bank chief executives are also privately concerned about the boom in self-certification lending, which has tempted some borrowers to exaggerate their income, leaving them exposed to a downturn.

Halifax data shows that over the past two years price growth in the south of England has been anaemic, with the north acting as the main driver. The market above the Trent now looks set to slow, with the number of first-time buyers down 30% in the past year.

Gordon Brown has pooh-poohed fears of a housing crash, and to be fair, it is hard to see what would trigger one.

But it is an irony that Brown's success in creating a stable low interest rate, low inflation economy has spurred so many of us to take on so much more risk in the property market.

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