Bank warns of commercial property 'shock'

The Bank of England sought to play down the threat of a speculative housing bubble yesterday as the first house price survey for November showed property price inflation hit a 21-month high last month.

However it warned of "vulnerabilities" in the wake of sharp price rises of commercial property driven by investors' search for high-yield assets.

Mervyn King, the Governor, said the most dangerous trigger for a slump in prices would be a sudden jump in long-term interest rates.

His comments, to the Treasury Select Committee, came as the Nationwide said house prices rose 1.4 per cent in November to take the annual rate to 9.6 per cent, the highest since February 2005.

Mr King told MPs the ratio of mortgage loans to the value of homes was much lower than it was before the crash of the early 1990s, as were the number of borrowers with a mortgage of more than half the value. "That is one reason why there are less risks with home lending than in the early 1990s," he said when asked about a rash of mortgages offered at five times buyers' joint incomes. "The small pick-up recently in mortgage arrears is tiny compared with then ... so the probability of a significant negative equity would only occur with a very significant fall in house prices and that is not our central view."

He said the sharp rises in the prices of all assets - houses, shares, bonds and even fine art - had been driven by the fall in real long-term inflation rates to historic lows.

He said it was "conceivable" they would remain low, but warned: "If they were to adjust quickly you would see sharp movements in asset prices that would have a large impact on the world economy."

Earlier this month, David Miles, chief UK economist at Morgan Stanley and a former adviser to Gordon Brown, sparked controversy by suggesting that substantial house price falls were likely over the next few years.

Fionnuala Earley, chief economist at Nationwide, said the likelihood and size of any fall would depend on how overvalued the market already was. "Much of the fast run-up in house prices over the past decade can be explained by fundamental economic drivers such as supply shortages, growth in incomes and lower interest rates, rather than a large speculative bubble," she said.

She added: "With interest rates likely to have peaked at 5 per cent and the economy growing at a stable rate, there is no obvious trigger that would lead to a sudden loss of confidence. The labour market in particular is stable."

Separately Nigel Jenkinson, executive director of financial stability at the Bank, urged property owners to test that their portfolios could withstand an economic shock. "Commercial property has proved a source of instability in the past and is an area we monitor closely," he said.