property prices unsustainable going forward

Mervyn King warns of property price fall off.

03:03 15 June 2004

The governor of the Bank of England last night forecasted house prices could soon be heading southward.

Speaking at a CBI dinner in Glasgow, Scotland last night, Mervyn King said exorbitant property prices were unsustainable going forward into the medium term.

Property prices have risen some 20 per cent in the past 12 months and in many areas of the country the cost of a house has more than doubled over the past five years.

His warning to homeowners came as the Office of the Deputy Prime Minister found annual house price inflation in April 2004 stood at 10.0 per cent, up
from the 7.8 per cent in March.

Annual house price inflation in London was 7.9 per cent in April, up from 4.9 per cent on the previous month.

The retrospective ODPM study found little evidence of a cooling off of prices.

But a circumspect, forward looking Mr King said: "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."

"Anyone entering or moving within the housing market should consider carefully the possible future paths of house prices and interest rates," he added.

The Bank of England's monetary policy committee last week increased the cost of borrowing by twenty five basis points to 4.5 per cent, the fourth increase since November last year.

Mr King said it was impossible to predict how far interest rates would have to go to bear down on inflationary pressure.

"How far interest rates will need to rise in order to keep inflation on track to meet our two percent target for CPI inflation in the medium term is impossible to say with any degree of confidence."

Economists predict rates will rise to 5.25 per cent by year end.

Mr King's comments came on the day that a poll for the Royal Institution of Chartered Surveyors found that surveyors' optimism had been hit by the interest rate decision and the fear of more down the road.

RICS said price increases had slowed for the first time in six months, with 44 per cent of surveyors noting a rise in prices last month, down from 46 per cent in April.

The ODPM says the mix-adjusted average house price in the UK in April 2004 now stands at GBP168,600, up from GBP161,306 in March.