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News: UK Housing crash alert

Fri, 27 Apr 07

Britain's biggest building society warned yesterday of a housing crash if interest rates rise aggressively...

Nationwide said prices could fall sharply if borrowing costs were lifted above 6 per cent. But it said the market remained on course for a soft landing if rates were raised only once or twice more, to 5.5 or 5.75 per cent, as expected.

Fionnuala Earley, Nationwide's chief economist said:

"In our view, the talk of rates climbing to 6 per cent and beyond is overblown and if implemented in the current climate could be damaging to housing market stability.  Too sharp a rate hike could undermine market confidence and dry up demand swiftly. But on top of this, they could also lead to widespread payment difficulties which, in an illiquid market, could precipitate price falls."

Ms Earley said some month-on-month price falls next year could not be ruled out in any case, but "would not be a disaster". Indeed, prices in the north of England are already sliding, dipping by 0.4 per cent in the first quarter of the year. "But assuming the Bank of England doesn't increase rates in a knee-jerk way, widespread year-on-year falls are unlikely," she added.

May interest rate rise ‘looks like a certainty’

Rates would have to rise by another 2 percentage points before affordability for buyers became as stretched as it was before the property crash of the early 1990s, the building society said.

The warning came as Nationwide said the average price of a home rose by 0.9 per cent to £180,314 in April. It was the biggest one-month increase for four months and drove the annual rate of increase up from 9.3 to 10.2 per cent. Ms Earley said the acceleration made an interest rate rise at the Monetary Policy Committee's next meeting on 10 May "look like a certainty".

Despite April's strength, Nationwide insisted that the underlying picture is one of a cooling market, and said the return to double-digit annual growth largely reflected a weak period this time last year. The three-monthly trend, which smoothes the volatility of the monthly series, shows prices increased by 2 per cent between February and April, the smallest gain since last August.

Monetary conditions ‘edging towards restrictive’

Meanwhile, the MPC member Paul Tucker signalled rates would not have to be lifted much higher if inflation falls back "quite sharply" towards the 2 per cent target as expected.  “With Bank rates at 5.25 per cent and a modestly upward sloping money-market curve, I have characterised monetary conditions as 'edging towards restrictive'," he told a hedge fund conference.

But he added there was "absolute determination" within the MPC to maintain price stability and anchor inflation expectations to the target. He also repeated warnings, set out in the Bank's Financial Stability Report earlier this week, that financial markets had become worryingly complacent about risk, particularly credit markets.

He urged banks to put in place stress-testing models that will predict the impact on their operations if the market seized up.

"In 10 years' time ... we may be better informed on whether the changes in the structure of our financial markets help or hinder the preservation of stability. A benign outcome would be more likely if the industry were to maintain its efforts on improving ex-ante measures to handle stress," he concluded.

 

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