The Bank of England has conceded that the unrelenting increase in house prices cannot be endured in the medium term.
The November 2003 Inflation Report by the Bank of England states that house price inflation has been well above earnings growth and that this is not sustainable in the medium term. It also reveals mortgage approvals have increased in the third quarter compared to earlier in the year and that net reservations have also recovered.
The report also indicates house prices have risen relative to household income, but that unsecured lending has risen by 15% per year since 1995. Unsecured debt owed to lenders has also risen from 11% of household income in 1993 to over 22% in 2003.
Overall, the bank says the UK economy appears stronger than in August and expects inflation to remain close to the government's 2.5% target over the next two years. Mervyn King, governor of the Bank of England, says: “Everyone needs to think carefully about the amount of debt which they can afford. There is a risk that heavily indebted households will be badly affected by changes in economic circumstances or interest rates.”
Vince Cable MP, Liberal Democrat shadow chancellor, says: “With house price inflation five times higher than general inflation, even the bank now admits the housing market is overpriced. This puts further upward pressure on rates, which will hurt those borrowing at the edge of their means. The bank is impotent in the face of the dreadful imbalances in the economy.
Cable adds the government and the Financial Services Authority must act to rein in irresponsible lending habits and that the government must encourage a soft landing for the housing market to avoid the dreadful circumstances of the last crash, with negative equity and repossessions.