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Last Updated: Tuesday, 15 June, 2004, 12:30 GMT 13:30 UK
House prices may fall, says King
Mervyn King outside the Bank of England
Mr King denies scaremongering
House prices may start to fall, the governor of the Bank of England has warned, saying people should be wary of taking the plunge into buying property.

Mervyn King said prices were now "well above what most people would regard as sustainable in the longer term".

He also gave a clear indication that there may be further interest rate rises on the horizon.

The news came as a new survey suggested house price growth had slowed for the first time in six months.

Mr King was speaking days after the Bank's Monetary Policy Committee increased interest rates by a quarter of a percentage point for the second month in succession, bringing the base rate to 4.5%.

Stretching the limits

"There are some early signs, from surveys, of a slowdown in the housing market," Mr King told delegates at a CBI Scotland dinner.

"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.

"So anyone entering or moving within the housing market should consider carefully the possible future paths of both house prices and interest rates."

A downturn in the housing market could lead to a sharp correction in consumer spending, a key risk facing the UK economy, Mr King warned.

Mr King later stressed that he was not predicting a housing market crash.

"All I did was to point out that when people are thinking of moving into the housing market they should be aware that house prices can sometimes move down as well as up," he told the BBC.

"And anyone who stretches themselves to the limit by taking out a very large mortgage needs to be aware both that it's possible interest rates might go up further and that house prices do not inexorably always go upwards."

At his monthly Downing Street news conference, Prime Minister Tony Blair refused to be drawn on Mr King's comments.

"I don't think there is any point in me being a pundit about what the Governor has said. He has said what he has said for the reason that he has given and I think those words stand on their own," Mr Blair said.

Rates biting

Mr King 's comments came as the monthly survey from the Royal Institution of Chartered Surveyors (Rics) said the interest rate rise had slowed the rate of house price growth for the first time in six months.

Heated speculation over interest rates has cooled buyer activity
Ian Perry, Rics housing spokesman

Buyers' confidence has already been hit, Rics said, but added that a shortage of homes for sale would continue to put an overall upward pressure on prices.

Rics said 44% of its members saw rises in May, down from 46% in April.

At the same time a fall in the number of people looking to buy a new home was also seen.

Rics said this was the first decline in the number of potential buyers since December and the biggest since April 2003 when uncertainty over the Iraq war temporarily suppressed demand.

Hot and cold

However, the group said the pictured varied across the regions, with southern regions showing a mild slowdown, while sharp price rises continued in the North, Wales and Scotland, which was included in its survey for the first time.

Rics now expects to see the strongest house price gains for the remainder of 2004 in the North West and Wales, while it predicts the market will remain static across southern regions.

"Heated speculation over interest rates has cooled buyer activity and last week's rate rise confirms the upward trend is likely to dampen any further price surges," said Rics housing spokesman Ian Perry.

"The latest interest rate rise in June brings the cumulative increase since last November to 1%. This should slow price rises in the latter half of the year, with surveyor confidence in the price outlook taking a knock."

The Rics survey is the second report on house prices in two days.

It comes after Monday's report from the Office of the Deputy Prime Minister, which said house prices soared ahead by 4.5% during April as growth was driven by demand for properties at the bottom end of the market.

The BBC's Hugh Pym
"Nobody can be too sure what prices will be a year on from here"

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