'Nice decade coming to an end'

ANYONE buying or moving house at present will read details of the Bank of England's twice-yearly Financial Stability Review with a great deal of alarm.

The Bank's concerns about the build up of mortgage debt and credit also present a direct challenge to policymakers in the City and the Treasury struggling to keep the British economy on an even keel after almost a decade of solid growth and low inflation.

Now the Bank clearly feels that the 'nice decade' is coming to an end and the prospect of the property boom ending in bust is increasingly possible.

The Bank of England's caution on the debt build-up will not make pleasant reading for Prime Minister Tony Blair or Chancellor Gordon Brown as they move towards the next General Election campaign.

The Bank's monetary policy committee, which sets interest rates, is likely to push on relentlessly in the months ahead with raising interest rates to 5% or beyond.

The City expects rates to peak at close to 5.5% in the first few months of 2005.

At the same time Brown is engaged in a titanic struggle with Whitehall as he seeks to cut spending budgets and slash the swelling army of Government workers to prevent the Government's budget deficit ballooning.

The Financial Stability Review emanates from the wing of the Bank of England run by Deputy Governor Sir Andrew Large, whose job it is to guard against a debt meltdown.

Since joining the Bank from Barclays, where he was deputy chairman, Large has been waging a one-man campaign against the profligacy of lenders and borrowers.

A veteran of City regulation, who was witness to the startling housing crash of the early 1990s, he is determined that this should never happen again.

Among the nine members of the monetary policy committee, Large has voted almost every month this year for an interest rate rise to calm the housing and credit markets.

He was the main advocate of a half per centage point rise last month - instead of the quarter point which came through - because he wanted to deliver a strong message to consumers.

Eventually he received the support of his fellow interest rate setters and base rates rose a further quarter point this month to 4.5%.

Now the odds must be moving towards a further turn of the interest rate screw in August, if not July.

But in recent days Large has attracted the most important convert to his cause in the shape of the normally cautious Governor of the Bank of England, Mervyn King.

For more than a year King dismissed the idea that there was a bubble in the housing market - although he did predict that the pattern of ever steeper property price rises would flatten.

This month saw King change his tone, alerting housebuyers to the possibility that the value of their homes could fall as well as rise and that interest rates were heading upwards. Large's concern is based on data collected by the Bank of England on a regular basis.

This shows that the ratio of household debt to income after taxation has climbed from less than 100% in 1997 to 135% now.

This is a similar figure to that at the time of the last housing crash in 1990, although experts point out that this time mortgage rates, at close to 6%, are much lower than then when they peaked at 14% and that unemployment is negligible against the more the 2.5m then in the dole queues.

Nevertheless, the report notes 'the UK household sector debt to income ratio has continued to rise rapidly, increasing households' vulnerability to any unexpected rises in interest rates or falls in incomes'.

There have been some signs in the last week or so that the Bank's harsh warnings together with the four interest rate rises since November are beginning to have an impact.

The closely-followed Nationwide building society June index of house prices, due to be released tomorrow, is expected to show that price rises have moderated, with an increase of less than 1% a month against recent rises of 2%.

Consultants Hometrack report today that house prices in many regions declined in June and that the rally seen in London this year is starting to fade.

Some of those most vulnerable if interest rates were to rise and house prices fall will be people in the buy-to-let market where in many cases mortgage and maintenance payments now exceed rental income.

Another weak group are households which have taken on credit card and overdraft borrowings. Despite the Bank's harsh predictions, these borrowings have continued to climb at a fast clip.

Markets rarely defy gravity for as long as they have in British housing in recent years. Once the adjustment downwards starts you can never be sure of where it will end.

What is predictable is that some of the instant wealth enjoyed by property buyers in recent times will prove to be illusory.