MPC Member Warns Of Consequences Of Housing Market Slowdown

Falling prices in the housing market and the reduction in the amount of mortgage lending represents a serious short-term threat to the economy. So says economist Kate Barker, member of the Bank of England’s Monetary Policy Committee. She want on to say that the Bank could not prevent this in the short term, but the MPC would be watching property and financial markets very closely.

Further rate cuts, she warned, might be hard to justify given the pressures of inflation. At the North Staffordshire Chamber of Commerce, she said:

“The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil. If credit tightening were to prove more severe than in the MPC’s present central projection, leading to a significant fall in lending to households and companies, this could prompt a further decline in property values.

“The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below target inflation.”

The Council of Mortgage Lenders has already raised the prospect of the financial market’s credit crunch choking off the property market. It warned last year that the “mortgage tap” might be turned off as banks need to borrow about £30bn to finance lending this year.

Ms Barker said that if house prices fell by 15%, then 5% of mortgage holders (2% of all households) would fall into negative equity. Although a small number, this would still be a pull down on the economy as a whole.

She said: “A prolongation of the present difficulties in accessing wholesale funds could restrict the quantity of mortgage lending during 2008. In this case, the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders’ balance sheets, reducing lending capacity further.”

Although she hinted that interest rates would ideally be cut further to head off this possibility she said that strong upward inflationary pressures in the economy made it likely that the Bank’s inflation target would be breached later this year, so cuts might not come as hoped for.