Leading economist Roger Bootle has told MPs that the Bank of England monetary policy committee needs to shock housebuyers by raising interest rates.
Speaking at the Treasury select committee meeting last week, three of the UK's leading housing market economists expressed concerns about the impact on the economy of a collapse in the housing market.
Independent economic consultancy Capital Economics managing director Roger Bootle is critical of the MPC's decision to raise interest rates incrementally. The committee raised rates by 0.25 per cent last week. Bootle believes that housebuyers need a short sharp shock from the Bank of England.
Bootle said: “I think that the MPC should act on the psychology of the housing market by using some sort of shock. I do not know if 0.25 per cent rises are going to do that.”
Goldman Sachs chief UK economist David Walton is not convinced that using rates as “shock therapy” would be effective but agreed that monetary policy from the committee had been too loose so far.
Imperial College London Professor David Miles, who is heading the Treasury review into long-term borrowing, agrees there is a need to drive home the message that house price rises are not sustainable.
Miles says if the public is under the misapprehension that property prices will continue to rise they are making a big mistake and could find themselves facing financial hardship.
The committee heard that even in a “dream scenario” where house price inflation stayed at zero, it would take seven years before the ratio of earnings to debt servicing returned to a balance.
Miles said: “The danger with a situation where households believe house prices will rise into double digits is that it will generate a bigger drop. I think the problem is that house prices could be driven to an even higher level and they will then be in a situation of negative equity.”