Tuesday, June 15 2004

Mervyn King, the Governor of the Bank of England, gave the strongest indication yet that house inflation is too high in a speech to CBI Scotland yesterday. This follows the decision last week by the MPC to increase the interest rate for the fourth time since November, putting it at 4.5%.

However despite these increases and speculation over a potential crash in the market, house prices have continued to increase at a startling rate, rising by over 20% in the past 12 months. Mr King said: ‘This sustained increase has repeatedly confounded expectations and taken the ratio of house prices to earnings to record levels.’

Citing the reasons for the sustained house price increases over recent years as ‘a shortage of housing supply and low levels of inflation and interest rates’, Mr King went on to say that a market slowdown is likely: ‘After the hectic pace of price rises over the past year it is clear that the chances of falls in house prices are greater than they were.’

He then issued a stern warning to potential homeowners: ‘Anyone entering or moving within the housing market should consider carefully the possible future paths of both house prices and interest rates’, giving a clear indication that interest rates will continue to rise.

Mr King’s speech follows a series of similar reports from Hometrack, Nationwide, Hamptons International, and Halifax, all of which have predicted house price inflation will ease in the near future.

Bank of England