Bank warns on house prices as QE anxiety hits sterling

Property prices may have further to fall, and recovery in the euro area has stalled

Stark warnings about the prospects for the economy and the housing market have come from the Governor, Mervyn King, and other policymakers at the Bank of England.

Giving evidence to the Treasury Select Committee, Kate Barker, a member of the Bank's Monetary Policy Committee and the author of two government-sponsored reports on the property market, said that "there are still adjustments to come in the housing market". She added: "It seems more likely than not to me that mortgage finance is clearly not going to be available going forward on the terms it used to be... I was rather surprised by the strength of prices in the housing market through last year and it's possible some people delayed decisions to move or put houses on the market. In some sense that can't continue."

An "aftershock" in the commercial property sector was also possible, Ms Barker said, as values may have "further to fall".

Mr King sounded more downbeat than he did at the Inflation Report press conference last week, and again kept open the option of expanding the Bank's quantitative easing programme (QE), which is currently on hold and which has pumped £200bn of new money into the economy over the past year.

But a split at the top of the Bank appears to be developing over the wisdom of more QE.

In a speech yesterday, the Deputy Governor for Financial Stability, Paul Tucker, warned that "the financial authorities need to be sensitive to when a marked appreciation in asset prices is becoming fuelled by rapid credit growth and looks likely to get carried away beyond anything warranted by fundamentals". He added: "The likelihood that inflation is likely to remain above target for a period means there is a greater chance that expectations of medium-term inflation may move upwards."

Last November the Bank's chief economist, Spencer Dale, also voiced concerns that QE might be engineering new asset "bubbles".

Still, Mr King's "doveish" tone on interest rates sent sterling lower against the euro and the dollar. "This nascent recovery is fragile. The tensions that underlay the build-up of large world imbalances have not been resolved," he said.

One factor that will depress the supply of funds for house purchase is the withdrawal of the Bank of England's Special Liquidity Scheme and other arrangements to provide support for the banks. Mr King said that the Bank is determined to withdraw the support by 2012, and that the banks had been urged to plug the "funding gap" of approaching £200bn that will result. Some institutions, predicted Mr King, will have to accept a smaller balance sheet.

Mr King's fears were partly confirmed yesterday with the release of the latest data from the British Bankers' Association. These showed mortgage advances back to the levels last seen in the summer, though much of this was a reflection of the rush for finance to beat the end of the stamp duty holiday in December. Approvals fell to an eight-month low of 35,083, from a 26-month high of 45,650 at the end of 2009.

Asked whether he judged that a further injection of money directly into the economy through "quantitative easing" might be needed, the Governor said: "It may be. We'll have to see how things pan out. My particular concerns at present derive from the state of the world economy. Recovery in our largest export market – the euro area – appears to have stalled."