Bank sees house-price uncertainty

"Uncertainty" in the housing market remains, the BoE head warns

"Considerable uncertainty" surrounds the UK housing market, the Bank of England's chief economist Charles Bean has warned.

He also suggested UK interest rates may not have peaked, during a speech to the Colchester Town Partnership.

"Neither I nor my colleagues... know how the data will unfold... and it is the data that will determine where interests rates go," he explained.

In addition, he predicted that house prices could become more affordable.

"An average house today costs about six times average annual earnings," he said. "Whereas the historical multiple is somewhat below four.

"It is difficult to rationalise the full extent of the increase in house prices and it is likely that the ratio of house prices to earnings will probably continue to ease for a while, though a return to historical norms seems unlikely."

Demand for property

In the speech on Thursday, he said there were good reasons as to why house prices had risen relative to earnings.

"The transition to a low inflation, low interest rate environment has shifted the real burden of repayments for a typical mortgage into the future, so making it easier initially for cash-strapped households to service a loan of a given size."

He added that "disillusion" with the performance of the stock market and concern about pensions had also led to an increase in demand for property.

Mr Bean also implied that the slowdown in the housing market would not affect consumer spending - a key driver in the UK economy - as much as it might have done in the past.

"Historically, house price inflation and household spending growth have moved together, but that probably simply reflects the impact of changes in households' expectations of their future incomes."

In the current economic climate, he said it would be "reasonable to expect the impact on spending of slowing house price inflation to be equally muted".

However, he would not be drawn on the extent of the housing price slowdown.

"It must be recognised that there is considerable uncertainty here, both about the extent and duration in the slowing of house price inflation and the strength of the connection with consumer demand," he warned.

Falling prices

Earlier this week, Barclays said that UK house prices were "coming off their peaks" and could fall by 20% in the next three years.

The lender predicted consumer spending would be hit as a result but did not predict a "crash".

But opinion is split on how the UK housing market will develop and whether there will be a crash or not.

Analysts at Goldman Sachs have suggested prices would dip between 10 and 15% over the next 18 months, while a year ago Capital Economics forecast a 20% "peak-to-trough" drop.

Lenders Halifax and Nationwide both reported monthly decreases in house prices for October, but ruled out the possibility of large falls.