Housing market capable of suddenly turning scalding hot - BoE's Dale

LONDON Fri Dec 13, 2013 12:38pm GMT

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LONDON (Reuters) - The Bank of England is fully aware that Britain's housing market has a "microwave-type quality" with a tendency to go suddenly from lukewarm to scalding hot, its chief economist said on Friday.

But Spencer Dale said the central bank now had more tools to deal with that risk than in the past.

Dale's comments echo those of Governor Mark Carney who warned this week that Britain's housing market had a history of moving "from stall speed to warp speed."

Record low mortgage rates and a sharp economic upturn has lifted annual house price inflation in Britain to almost 8 percent, according to mortgage lender Halifax. London and parts of south-east England are recording even steeper gains, stoking fears of a bubble.

Keeping property price gains in check without crimping growth in the rest of the economy is one of the biggest challenges facing the Bank of England.

Carney has been clear that he wants to use so-called macro-prudential tools rather than interest rates to rein in the property market. He announced two weeks ago that the BoE would scale back a scheme to boost mortgage lending.

Dale acknowledged that household spending had so far been the biggest driver of Britain's economic recovery. That was not surprising in the early stages of a recovery, he said, but growth would need to broaden to be sustainable.

"The durability of the recovery will depend on the baton of growth being handed over to the corporate sector, whose spending and investment will help to foster stronger growth in productivity and real incomes," he said.

The strength of Britain's recovery this year has taken all forecasters by surprise. Having been a laggard for several years Britain has now overtaken most of its Group of Seven peers, with annualised growth in excess of 3 percent.

Dale attributed the recovery to two main factors - improved credit availability and reduced uncertainty about the outlook for the euro zone.

It was possible that previous monetary easing could gain traction as economic uncertainty continued to abate, he said, but suggested it may be a long time before trust between companies and banks was restored.

"Many companies were let down by their banks during the financial crisis, and I fear that many will be reluctant to return to a business model which relies on their banks providing liquidity and support in times of need," he said.

"The scarring effects of the financial crisis and the uncertainty it brought with it, together with the fiscal consolidation and the weakness of the euro area, are likely to continue to weigh on the recovery over the next few years."

(Reporting by Christina Fincher)

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