Housing Market Warnings

Kate Barker, a member of the Monetary Policy Committee, is warning that falling house prices and tighter lending could create a downward spiral which could threaten short-run prospects for the UK economy.

The BBC website carries details of her comments, including the analysis of a 15% fall in house prices and its possible impact on negative equity in the property market. She reiterates the widely-covered dilemma that the Bank of England faces in juggling slowing growth and significant inflationary pressures (see Geoff’s recent blog entry on this).

“The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil,” she said.

“If credit tightening were to prove more severe than in the MPC’s present central projection, leading to a significant fall in lending to households and companies, this could prompt a further decline in property values.

“The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below target inflation,” she told the North Staffordshire Chamber of Commerce.

The CPI ceiling of 3% looks likely to be breached this year (Tim Besley, another MPC member, is reported in The Times as supportive of rate cuts in response to problems in financial and housing markets) and this, combined with slower growth, could well lead to declining real incomes for the first time in the UK since the early 1990s - when we also saw falling house prices and negative equity hit homeowners particularly hard.