Bank of England and IMF on a collision course over house prices

The economy should survive the impact of a crash in house prices, the Bank of England said in a study published today.

The economy should survive the impact of a crash in house prices, the Bank of England said in a study published today.

While it admitted that soaring levels of debt and house price inflation had loud echoes of the 1980s, when a similar boom ended in a recessionary crash, the Bank said it believed the economy was on a much sturdier footing now. The study came just hours after the International Monetary Fund, the global financial watchdog, warned that the UK could suffer another property crash.

The two reports mark the latest clash between the UK authorities and the IMF over the fate of the housing market, which economists agree will be one of the most pressing economic issues for policymakers in the run-up to a likely general election next spring.

It is the third time in recent years that the IMF has warned of a fall in UK prices and this time it has published just ahead of the meeting of the Group of Eight nations that includes the UK. It might lead to a frosty exchange between Gordon Brown, who is chairman of the IMF's monetary and financial committee as well as Chancellor of the Exchequer, and senior officials at the IMF when he flies into Washington next week.

The Treasury was keen to play down the impact of the IMF report yesterday, saying that households had much stronger balance sheets than they did two decades ago. A spokeswoman said its position had not changed since June when Ed Balls, then the Chancellor's chief economic adviser, said: "There are important reasons to believe that households' overall balance sheets are and will remain consistent with macroeconomic stability."

The Bank's analysis supported Mr Balls' view, saying both unemployment and interest rates were much lower than they were in the 1980s - and were expected to stay so. It also pointed out that significantly fewer new mortgages had a loan to value ratio (LTV) greater than 100 per cent - where the loan is greater than the house price, while even the numbers with 80 or 90 per cent LTVs has fallen "sharply".

The Bank said: "The distribution of debt across new borrowers suggests that if there was a fall in house prices, fewer households than in the 1980s would be likely to face problems borrowing and the number of households experiencing negative equity would be lower."

The paper, published in the Bank's quarterly bulletin and written by two of its economists, also points out that fewer transactions than in the 1980s meant fewer people had bought a home near the peak of the boom.

In addition the authors argue that in recent years households have matched their appetite for debt with a willingness to build up their financial assets, providing a cushion against a fall in house prices. They said: "So unless households face an unexpected large negative shock - for example that unemployment or interest rates rise substantially more than they expect - the risks ... are lower than in the past."

The key issue is whether there will be a house price crash. The Bank has consistently argued that house price inflation will slow to zero in two years, although it has been forced to push the deadline back as house price inflation has refused to subside.

The IMF has taken a different stance, issuing a gloomy warning over housing markets in the UK and many other countries. It said that houses in Britain were overvalued by as much as 20 per cent and a crash in prices could "not be ruled out" as interest rates continued to rise.

According to its twice-yearly world economic outlook: "For the UK, a drop in house prices cannot be ruled out, reflecting the higher forecasting uncertainty in that country. The evidence suggests that current house prices appear out of line with fundamentals in some countries, including the UK, highlighting the risk of a more pronounced drop in prices." Its analysis showed that prices had nearly doubled since 1997 and the UK had posted the largest average annual increase of any major country between 1971 and 2003.

It analysed the traditional causes for rising house prices - interest rates, income growth, affordability and lending growth - but found they could not explain the increase. David Robinson, the deputy director of the IMF's research department, said: "There's a fairly large chunk that we cannot explain - I think of the order of 15 to 20 per cent. That's the reason why we conclude that there may be overvaluation of house prices in the UK relative to fundamentals."

The National Association of Estate Agents said the IMF had got it "badly wrong". Peter Bolton King, its chief executive, said: "The IMF has not taken into account the fact that there is a desperate shortage of new housing in the UK." He acknowledged that house prices were probably too high but said with average incomes growing by 4.5 per cent it would only take four years for the ratio between house prices and incomes to come back into line with the long run average.

"We believe the IMF is needlessly flying a kite and scaring homeowners," he said. The small print of the IMF report revealed it was based on interest rates hitting 5.5 per cent, a view now supported by a only minority of economists.

One of those, John Butler at HSBC, said he carried out a similar exercise 18 months ago, including a measure of the housing shortage, and found that between 10 and 15 per cent of the house prices growth could not be explained by economic fundamentals. "I would agree with the IMF's conclusions [that property's overvalued] but I think you need a trigger for a crash and I don't know what that would be," he said. "So I think we will get five years of house prices going nowhere."

Arts & Entertainment
Ricky Gervais at a screening of 'Muppets Most Wanted' in London last month
tvAs the second series of his divisive sitcom 'Derek' hits screens, the comedian on why he'll never bow to critics who habitually circle his work
Arts & Entertainment
Don (John Hamm) and Megan (Jessica Paré) Draper are going their separate ways in the final series of ‘Mad Men’
tvReview: The suits are still sharp, but Don Draper has lost his edge
News
news
Life & Style
Going down: Google's ambition to build an elevator into space isn't likely to be fulfilled any time soon
techTechnology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
VIDEO
News
David Cameron sings a hymn during the enthronement service of The Most Rev Justin Welby as Archbishop of Canterbury, at Canterbury Cathedral last year
news
Life & Style
From long to Jong: Guy Pewsey outside Mo Nabbach’s M&M Hair Academy in west London before the haircut
fashionThe Independent heads to an Ealing hairdressers to try out the North Korean dictator's trademark do
Sport
Vito Mannone fails to keep out Samir Nasri's late strike
sportMan City 2 Sunderland 2: Keeper flaps at Nasri's late leveller, but Black Cat striker's two goals in 10 minutes had already done damage
Extras
indybest10 best smartphones
News
peopleRyan Gosling says yes, science says no. Take the A-list facial hair challenge
Arts & Entertainment
tvCreator Vince Gilligan sheds light on alternate endings
Life & Style
Google Doodle celebrates the 63rd anniversary of the Peak District National Park
tech
News
Paul Weller, aka the Modfather, performing at last year’s Isle of Wight Festival in Newport
people
Life & Style
Michael Acton Smith founded Firebox straight out of university before creating Moshi Monsters
techHe started out selling silliness with online retailer Firebox, before launching virtual creatures who took the real world by storm
News
Ethical matters: pupils during a philosophy lesson
educationTaunton School's policy of putting philosophy at heart of its curriculum is one of secrets of its success
Arts & Entertainment
Play It Forward: the DC Record Fair in Washington, US
musicIndependent music shops can offer a tempting alternative to downloads on Record Store Day
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Analyst - Financial services, Client data, LEI

£40000 - £50000 per annum + BONUS + BENEFITS: Harrington Starr: A leading, Cit...

Management Consultancy - Operational Research Analysts

£35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

Corporate Actions Consultant - Market data, ISO15022, presales

£45000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: Corporate Acti...

Prudential Risk/Operational Risk Associate - London

£350 - £400 per day: Harrington Starr: An opportunity has arisen at a FCA regu...

Day In a Page

Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics

Is sexual harassment a fact of gay life?

Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics
Moshi Monster creator Michael Acton Smith: The man behind a British success story

Moshi Monster creator Michael Acton Smith

Acton Smith launched a world of virtual creatures who took the real world by storm
Kim Jong-un's haircut: The Independent heads to Ealing to try out the dictator's do

Our journalist tries out Kim Jong-un's haircut

The North Korean embassy in London complained when M&M Hair Academy used Kim Jong-un's image in the window. Curious, Guy Pewsey heads to the hair salon and surrenders to the clippers
A History of the First World War in 100 moments: A forgotten naval victory in which even Nature played a part

A History of the First World War in 100 moments

A forgotten naval victory in which even Nature played a part
Vespa rides on with launch of Primavera: Iconic Italian scooter still revving up millions of sales

Vespa rides on with launch of the Primavera

The Vespa has been a style icon since the 1950s and the release this month of its latest model confirms it has lost little of its lustre
Record Store Day: Independent music shops can offer a tempting alternative to downloads

Record Store Day celebrates independent music shops

This Saturday sees a host of events around the country to champion the sellers of well-grooved wax
Taunton's policy of putting philosophy at heart of its curriculum is one of secrets of its success

Education: Secret of Taunton's success

Taunton School, in Somerset, is one of the country's leading independent schools, says Richard Garner
10 best smartphones

10 best smartphones

With a number of new smartphones on the market, we round up the best around, including some more established models
Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

The former Australia coach on why England must keep to Plan A, about his shock at their collapse Down Under, why he sent players home from India and the agonies of losing his job
Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal