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News: House price 'credit turmoil' alert

Wed, 20 Feb 08

Falling house prices and reduced lending are short-term threats to the economy, warns a leading economist....

Kate Barker, a member of the Bank of England's Monetary Policy Committee, told the BBC: "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”.

Credit squeeze

The possibility of the credit squeeze in the financial markets choking off the property market has already been raised by the Council of Mortgage Lenders.  Last year, it warned that the crisis in the financial markets might turn off the "mortgage tap" because banks needed to borrow about a third of the £90bn or so they expect to lend this coming year.

Speaking in a personal capacity, Ms Barker noted that even if house prices fell by 15%, only 5% of mortgage holders - and thus just 2% of all houesholds - would find they were in negative equity, whereby their homes were worth less than their mortgages.

But the interplay of reduced lending and falling property prices would still be a big drag on the wider economy.

Ms Barker added: "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."

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