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Sunday, 10 November, 2002, 09:07 GMT
Bank fears housing crash

The Bank of England is poised to warn of the dangers of a collapse in house prices.

The Bank is expected to say that it cannot cut interest rates to boost the flagging manufacturing sector for fear of launching a runaway boom in house prices that could suddenly burst, plunging the economy into recession.

Stamp duty is a tax on mobility, that penalises households that move more frequently

Steve Wilcox, University of York
The Bank left interest rates unchanged last week at 4%, despite a cut in US rates from 1.75% to 1.25%.

Members of the Bank's Monetary Policy Committee (MPC) are worried that the consumer boom keeping the UK economy afloat is being driven by people cashing in on high house prices.

They fear that if the housing boom goes into reverse, the huge debts individuals have taken on could become unmanageable, driving down consumer spending.

Open in new window : UK property market
The house price boom

House price rise

The Bank of England will be releasing its latest inflation forecast on Wednesday, and it is likely to say that despite the high house prices, overall inflation is likely to remain below its 1.5-3.5% target range for the foreseeable future.

Last week the Halifax said that house prices were rising at a record 30.4% annually, with a rise of nearly 5% in October alone.

And the Land Registry found that an average property in England and Wales is now worth 146,150,compared with an average value of 123,856 a year ago.

And estimates show that equity withdrawal - where people get a higher mortgage in order to finance current spending - is rapidly increasing.

The Centre for Economics and Business Research says that it has reached 40bn, or 6% of consumer spending.

The house price boom has now reached the levels of the 1988/89 boom, which ended in a sharp correction coupled with high interest rates, negative equity and a recession.

Total consumer debt, including mortgages, has reached 800bn, and is rising by 14% per year.

The difference between 1989 and the current situation is interest rates, which are at historic lows, compared to the doubling of rates from 7.5% to 15% during the early 1990s.

Unemployment is also lower now, and rising real incomes are fuelling the house price boom.

That means that so far housing is still more generally affordable - except for first-time buyers in the Southeast.

So far the potential effect of job cuts and lower wages on housing prices has been most evident for luxury homes in London.

The top end of the London market has been hit by a reduction in City bonuses and large-scale layoffs, with prices in Kensington and Chelsea (which has the highest average house prices in the country) falling by around 15%.

Government plans

There is speculation that the chancellor may want to tackle house prices in his pre-Budget report, which is likely to take place on 26 November.

The chancellor may be tempted to raise further stamp duty, which he has already increased substantially before, to stop speculative purchases of houses.

The difficulty will be that such a tax would be seen as yet another attack on the middle class, who could also face cuts to their pension contribution tax rebates and higher university tuition fees.

However, the effect of rising house prices has been to sharply increase the chancellor's tax take from stamp duty already.

A study commissioned by Radio 5 Live suggested that, within a decade, one in four households will be paying the higher rate of 3% of stamp duty when they moved house.

The report's author, Professor Steve Wilcox of York University, warned that stamp duty could have negative economic consequences.

"Stamp duty is a tax on mobility, that penalises households that move more frequently," he said.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Evan Davis
"Young people increasingly have to beg, steal or borrow deposits"
The BBC's Russell Hayes
"Prices are still rising strongly"

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08 Nov 02 | Business
08 Nov 02 | Business
04 Oct 02 | Business
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04 Oct 02 | Business
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