Bank chief raises fears of collapse in housing market

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The Independent Online

The Bank of England yesterday warned that house prices could crash as new figures revealed the first cracks in Britain's debt-laden property market.

The Bank of England yesterday warned that house prices could crash as new figures revealed the first cracks in Britain's debt-laden property market.

In a sign of growing worries over a house price slump, Charlie Bean, the Bank's chief economist, said it might have to raise interest rates more aggressively to prevent the build-up of an unsustainable bubble.

"There could be a sharp correction to house prices, but equally house prices could just stagnate for a while until earnings catch up," he told an audience of high-powered economists. "But we simply do not know how things will unfold - only time will tell."

He said the strength of the housing market was a key reason for a "somewhat sharper withdrawal of the stimulus" - code for raising rates faster than once every three months.

"Worries that excessively high house price inflation in the present raises the probability of a sharp correction in the future... points to a tighter policy in the near-term in order to moderate the overvaluation in house prices," he said.

But he dampened fears of half-point rate increases, saying: "We are not in the business of trying to clobber the consumer."

Analysts said the speech was a clear signal the Bank would raise rates next week - and again later in the year. Richard Iley, at BNP Paribas, said: "A typically elegant effort that subtly repositions Mr Bean on the Bank's hawkish wing."

Government figures showed the number of families under threat of home repossessions has hit a three-year high. Mortgage banks launched a total of 18,135 county court actions for repossession over the spring, the highest since the first quarter of 2001.

The Council of Mortgage Lenders said the number of repossessions could double by the end of the year after more than a decade of uninterrupted falls. Michael Coogan, its director general, said: "With interest rates rising, it looks as if the long run of declining arrears has now flattened out."

He forecast that repossessions, which totalled just 3,240 in the first six months of the year, could approach 9,000 by the end of the year. Mr Coogan described it as a "marginal increase" when compared with almost 12,000 in 2002 and a peak of 58,540 in 1993.

Meanwhile HBOS, Britain's biggest mortgage lender, said it had deliberately scaled back the amount of new loans because rising mortgage rates had made it more difficult for people to manage repayments.

HBOS's share of net lending fell from 25 per cent to 17 per cent in the first half of the year. James Crosby, the chief executive of HBOS, said lending was "quite deliberately down on the previous year as interest rates rose". He added that HBOS's share of the mortgage market could come down further, though he ruled out ceding its No 1 position to its competitors. Mr Crosby said HBOS had seen signs the market was "slowing". But he said there was unlikely to be a crash because unemployment remained low and there was a shortage of housing in the south of England.

Later this morning the Bank will publish figures showing the total household debt - mortgage loans and unsecured borrowing - hit £1,000bn for the first time in June. The landmark will spark calls by politicians and analysts on the Government and the Bank to take action to prevent a repeat of the boom and bust of the early 1990s.

Mr Bean used his speech to pre-empt criticism aimed at the Bank saying £1,000bn debt did not mean the economy was sitting on a "time-bomb". He said the debt was matched by an accumulation of wealth. He also revealed the Bank would now use market forecasts of base rates - which point to a further three rises by the end of the year - rather than the current rate when compiling its forecasts.

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