King tries to calm fears of return to negative equity

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The Independent Online

The Governor of the Bank of England yesterday moved to calm fears of a return to the 1980s era of negative equity and recession if house prices crashed.

But Mervyn King reiterated his warning that homebuyers should not assume house prices would carry on rising "for ever".

He told MPs the current level of house prices was "unsustainable" but said the housing market could cool without the needs for falls in prices.

"The balance of risks is that there would be some downward adjustment in the next few years [but] it is hard to judge whether house prices would fall or not," he told the Commons Treasury Select Committee.

"We do draw some comfort from the fact that lenders seem to have learnt from excessive lending in the past. It does not appear that they have lent on loans-to-value ratios so high that if there were an adjustment in house prices a large number of people would find themselves unable to meet their [mortgage] payments."

Rachel Lomax, a deputy governor, said it was wrong to assume the UK would suffer a recession if mortgage payments rose sharply. "That is a gross oversimplification," she said.

"We have to look at the jobs market and more generally in the economy and not be tempted to generalise from the experience of the early 1990s."

Paul Tucker, an executive director at the Bank, said previous recessions had been accompanied by surges in unemployment. "I don't think we should visit the problems of the past."

Mr King faced a barrage of questions on the health of the housing market after his speech last week in which he warned that the chances of falls in house prices had risen. Yesterday he hammered home the warning, agreeing that house prices were "quite possible significantly" too high and urged homebuyers to think of the impact of rising interest rates.

"Anyone making the assu-mption that house prices always go up because they've gone up over the last five years, that's not a very sensible way to think of the risks involved," he said. "It's important people take on board that these things can change and don't get in a position where things can only be financed if things don't change."

His comments came as a survey of around 250 economists found that two-fifths said prices would fall between now and 2007.

Nearly one in five of the members of the Society of Business Economists, surveyed for the BBC, forecast a 10 per cent drop in prices - equivalent to wiping £16,000 off the value of the average home. Only 15 per cent said prices would rise faster than average earnings, with the rest forecasting real terms stagnation.

Mr King and his colleagues denied repeatedly that the Bank was targeting house prices and insisted it had not abandoned its "gradualist" approach by raising rates for two months on the trot. He said the rates were "in the ballpark" of where they needed to be in order to keep inflation on track and that the Bank had no plans to "shock" consumers out of their spending and borrowing binge.

Kate Barker, an external member of the Bank's Monetary Policy Committee, said: "Shock for the sake of it should not be part of the central bank's armoury.