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The King&#39s speech

Bank of England governor Mervyn King is looking to reshape the housing market with words.

Two weeks ago in Glasgow, King told a CBI Scotland dinner: “The chances of falls in house prices are greater than they were.” The speech was translated into bursting bubbles throughout the national newspapers the next day.

He followed that up last week with another warning when he was questioned on his opinion on property prices, telling a Treasury sub-committee: “We think it is likely that they are above a sustainable level but we do not know by how much. After a year in which house prices have risen very rapidly, the chances of house prices falling are greater than they were.

“Anyone who is making the assumption that house prices always go up because they have gone up over the past five years, that is not a very sensible way to think of the risks involved.”

His words are being heeded. A week after the first warning, the UK&#39s biggest electrical retailer Dixons said it had a cautious outlook on the UK market, principally blaming higher interest rates and “the potential for a slowdown in house prices”.

But flexing the verbal tools of monetary policy is a tricky art that few have managed to perfect. Even US Federal Reserve chairman Alan Greenspan – famous for moving markets with a sentence – has made slip-ups.

Housing expert John Wriglesworth says King&#39s latest comments are scare tactics. “King does not trust interest rates and thinks house prices are not going to turn,” he says.

Wriglesworth agrees that if property prices did rise by another 40 per cent in the next two years, matching the growth of the past two years, it would definitely crash.

He says: “King is worried about this and thinks that making statements like this will avoid a crash, refining lending rather than busting it. But this is a dangerous thing to do.

“King&#39s comments may have been cautious and deliberate but when the media got hold of them it was transformed into doom and gloom predicted from the Bank of England. Newspapers distort comments like King&#39s and that is always the risk you are taking. It was a shot across the bows and the sad thing is it was not even necessary.”

He says house prices had been starting to slow before King&#39s comments and there are as yet no obvious signs of a looming crash, such as dramatic increases in defaults and repossessions. “The seeds of a slowdown had already been sown.”

Wriglesworth is insistent that the market has not been heading for a crash but rather a plateau. “There is no need to panic or over-react, which is what I fear some people might do after King&#39s comments.”

Similar messages are coming from other areas of the marketplace.

In Halifax&#39s forecasts for the economy and housing market released last week, the biggest mortgage lender in the country says it believes the housing market has peaked and will slow gradually over the next two years with increasing interest rate rises. But Halifax chief economist Martin Ellis says there will not be a crash.

DWS global chief economist Steven Bell points out that the Bank of England does not have a very good track record of forecasting markets.

The role of the bank&#39s monetary policy is to maintain financial stability within set targets. If there is a meltdown the bank could get the blame. “King has tried subtlety but it has not worked so far. These comments were his attempt at a harder approach.”

Bell says Greenspan is seen as the master of managing markets but King&#39s comments do not show the same polish. He says: “The Greenspan/King com-parison is a very important one to make, considering the new methods that King is beginning to use, commenting in this way about markets in a bid to change them.”

He adds that King has been increasingly aware that raising interest rates is not providing the solution to soaring house prices, much in the same way that Greenspan was concerned about the runaway technology market in the late 1990s.

But Bell says the styles of Greenspan and King styles differ significantly. He says: “Greenspan is very particular and sparing with what he says but King seems to shoot from the hip. In the end, it is what the media will read into these comments that can be the real problem.”

However, Bell points out that it is dangerous to push the comparison too far. “The US and the UK are two very different economies and they react very differently to the actions of their central banks.

“The banks themselves also work very differently. Greenspan is the all-powerful head of the Fed but King, as governor, acts within the executive team. And as Governor of the Bank of England he also sits on the monetary policy committee so it is in no way King&#39s call alone.”

But King&#39s comments seems to be consistent with thinking from other members of the committee. A week after King spoke in Glasgow, fellow monetary policy committee member Richard Lambert echoed these sentiments, saying that he believed a price fall was on the way in the property market.

Whether or not a crash is on the way in the housing market, it is clear for the moment prices seem to have reached a plateau. For now, it seems that King&#39s new verbal style of monetary policy as well as the quarter-point rises in interest rates seem to have sufficed.


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