Monday, March 21, 2005

Bank of England's Barker Sees Signs of House-Price `Bubble'

March 21 (Bloomberg) -- Bank of England policy maker Kate Barker said there are signs of a ``bubble'' in the 3 trillion pounds ($5.7 trillion) U.K. housing market and that consumer debt may have risen to ``unsustainable'' levels.

It's not clear how big an ``adjustment'' is needed in the property market, Barker said in a speech in Washington D.C., adding that the central bank shouldn't try to target lower home prices as policy should be focused on inflation.

``There are some signs which might indicate a housing bubble; increased private buying of housing for letting with the expectation of capital gain, and parents using equity from their own homes to assist children with deposits,'' Barker said. ``But it is not clear how far these changes may have contributed to higher prices.'' She said it's also not clear ``what scale of adjustment in house prices monetary policy should seek to achieve.''

Home values in the U.K., Europe's second-biggest economy, have surged 160 percent in the past 10 years, according to HBOS Plc, the nation's biggest mortgage lender. The Bank of England raised interest rates five times between November 2003 and August 2004 to prevent soaring asset prices from fueling inflation and destabilizing the 1.1 trillion-pound economy.

Home values are at ``historically high levels at present'' in relation to personal incomes, said Barker, a member of the bank of England's nine-member Monetary Policy Committee. Still, lower mortgage costs, inadequate housing supply and increased use of houses as a store of value for retirement may have led to higher long-term sustainable property values, she said.

`Uncertainty'

``There are good reasons for not acting to offset movements in asset prices per se,'' Barker said in a speech at the National Association of Business Economics Policy Conference. ``The first is the considerable uncertainty about whether or not a bubble exists and, if it does, how serious it is.''

Barker said Jan. 24 that the average cost of a home ``is perhaps not even the most important asset price,'' suggesting currency values were more significant. She published a report on housing supply for the government on March 14 of 2004 concluding that an additional 120,000 homes need to be built to bring house price increases in line with the European Union average.

Low nominal interest rates may have encouraged consumers to boost debt levels to ``unsustainable'' levels amid unrealistic expectations about future incomes, said Barker. The U.K. opposition Conservative party said on March 20 the nation's 1 trillion-pound debt mound represent a ``time bomb'' that may cause serious economic problems if there were an external shock such as an oil price increase.

Growing Debt

There are a number of low income households whose debt levels pose ``real problems,'' Barker said. Yet for people with more sound economic prospects debt may be a means of smoothing out patterns of consumption, and growing debt may reflect ``more stable economic conditions'' in the country, she said.

There are some signs of improving productivity in the economy, which may allow faster growth to coexist with stable inflation, Barker said. In addition, the labor market may not be ``quite as tight'' as previously estimated, she said.

There isn't yet enough evidence to support comparisons with the surge in productivity witnessed in U.S. during the mid-1990s, Barker said.

``While the latest data suggests some productivity improvement, it is too early to reject the alternative explanation that this is simply a cyclical rise,'' she said. ``Over the coming quarters it will be necessary to look hard at this question and remain open to the possibility of a structural improvement.''

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