Outlook: Housing's phantom menace looms

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IF YOU spent yesterday celebrating a windfall gain on your house after reading the Land Registry figures, spare a thought for the poor old Monetary Policy Committee.

Over at the Bank of England alarm bells are ringing. House prices rose 8 per cent in the year to June - including 6 per cent in the last quarter - while household savings ratios have hit levels as low as those last seen in the Eighties. To cap it all, mortgage equity withdrawal as a proportion of households' post-tax income is positive for the first time since 1992.

General price inflation seems as dead as a dodo, but could this house price inflation prove to be the Phantom Menace? To rework the film's slogan - house price rises lead to wealth gains, wealth gains lead to equity withdrawal, equity withdrawal leads to higher spending and higher spending leads to inflation. Higher inflation means interest rate rises, which force up borrowing costs and depress the housing market, leaving some people with expensive mortgages, a falling asset and a sour taste in the mouth.

Fortunately, there are some good reasons to believe that we are not heading for a repeat of the boom-to-bust cycle of the late Eighties. Firstly, house prices have not yet recovered to 1989 levels. According to Salomon Smith Barney, total housing equity net of mortgage debt amounts to pounds 1,066bn now compared with pounds 1,307bn in 1988.

Secondly the statistical rise in house prices based on a comparatively small number of sales, meaning short supply is distorting prices. Moreover, these gains tend to be concentrated in "hot spots" in London and other boom cities such as Leeds and Bristol. And finally, low interest rates have made it more affordable to buy a home that at any time since the Sixties.

All this is reason for comfort, but there are also some worrying clouds on the horizon. The Land Registry figures for the first time in the present cycle showed all regions of the country sharing in the rises. Only isolated cases such as Derby, York and assorted Welsh towns saw prices fall. Transactions numbers are also rising - up 31 per cent on the quarter and 3 per cent on the year.

Once asset prices start to inflate, they tend to develop the momentum of a runaway train that only rate hikes or external shocks can halt. General price inflation is at present below the Bank's target, but this may be mainly to do with the strong pound, which is sucking in imports and keeping commodity prices low.

With oil prices rising and signs of a manufacturing renaissance, inflation could quite soon cease to undershoot the target. Against a background of rising wealth and domestic demand, rates are set to move higher - possibly as high as the 7 per cent priced in by the money markets.