Falls in property prices is threat to economy

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by Kay Murchie

Kate Barker, a member of the Bank of England’s monetary policy committee (MPC), has warned that a downturn in property prices and a fall in mortgage lending are the biggest threats to the UK economy.

Ms Barker said that the Bank may not be able to act to stop this in the short-term. Consequently, the MPC will be paying special attention to the financial and property markets.

Ms Barker noted that even if house prices fell by 15%, only 5% of mortgage holders (2% of all households) would find they were in negative equity, whereby their homes were worth less than their mortgages.

Ms Barker argued that while cutting the base rate of interest would provide a spur to the property market, such a change would be impossible to justify in the face of demand push inflation.

In a speech at the North Staffordshire Chamber of Commerce, she said that the danger to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil.

Ms Barker concluded that it will be difficult for the MPC to take this into account quickly in its monthly deliberations on interest rates.