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House prices: will Bank of England step in to prevent 'bubble'?



Bank officials say interest rates are not the correct tool to control housing market


House prices: will Bank of England step in to prevent 'bubble'?

After years of house price growth, the Bank of England could step in to prevent a 'bubble' in the housing market, but it is unlikely to do this by raising interest rates.

After announcing a decision to keep rates on hold yesterday, the Bank of England's governor Mark Carney said he was aware of the trend of "house price growth picking up, activity in the housing market picking up", the Financial Times says. But amid a dovish signal on when rates might rise, he cited the bank's "macroprudential tools" as the mechanism to keep this rise in check.

The bank's deputy governor Dame Nemat Shafik told BBC Radio 5 Live's Wake Up to Money programme this morning that interest rates were not the tool to correct imbalances in the housing market. Instead she referred to the bank's Financial Policy Committee, which has specific powers "to do things like put limits on the amount of indebtedness that households can take on [or] reduce banks' ability to lend very risky loans" to curb excesses.

Shafik refuted accusations from some quarters that keeping rates at a historic low for as long as they have the base rate has been at 0.5 per cent since March 2009 has caused an unsustainable increase in household debt levels. "It used to be about 155 per cent [of average household income] at the time of the crisis, and it's come down to 135%. It's plateaued recently, but we do think it has improved," she said.

When it comes to the housing market, the belief that low rates are prompting rapid inflation in house prices is less contentious. Reporting that its own index shows prices rose by a staggering 9.6 per cent year on year on October to a record 205,240 on average, Halifax's housing economist Martin Ellis told The Guardian that "sustained low mortgage rates" that have been held down by the low base rate were partly to blame for soaring property demand.

Lucian Cook, the director of residential research at the real estate company Savills, clearly agrees. He told the Daily Telegraph that "if rates remain too low for too long house prices could rise to a level that would become unsustainable if rates were subsequently to rise sharply".

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