House-price 'bubble' may devastate economy - IMF

Britain is in the throes of a "house-price bubble" that could burst at any time with devastating consequences for the economy, the global financial regulator warned yesterday.

In the International Monetary Fund's annual assessment of the British economy, it said there was an "appreciable risk" that housing could scupper hopes of an economic recovery. "In particular, domestic demand is being sustained by high and increasing levels of household debt, fuelled by house-price inflation and low interest rates, which increases vulnerability to potential adverse shocks," it said.

"[IMF] directors called for heightened vigilance to these risks, especially regarding the possible existence of a housing-price bubble with its potential deflationary consequences."

But there was little sign of that yesterday from Halifax, the UK's biggest mortgage lender. It said the price of the average home jumped by 1.7 per cent in February, even faster than January's 1.5 per cent. That means prices are rising at an annual rate of 23 per cent. Martin Ellis, chief economist of the Halifax, said a healthy labour market and low mortgage costs would ensure households could pay their mortgage debts, and a long-term shortage of homes would support prices.

The IMF report also fore-cast economic growth of 2.2 per cent this year, up from 1.7 percent in 2002. The Government's official range for economic growth for 2003 is 2.5 to 3 per cent. The IMF urged the Treasury to boost taxes and cut spending over the medium term to bring down its deficits.

But the IMF said the Government's spending plans would not damage its credibility. "Directors commended the UK authorities for the pursuit of prudent and credible economic policies in the context of a sound medium-term policy framework."