Mervyn King, Governor of the Bank of England, gave evidence before the Treasury Committee of the House of Commons. Mr King was asked about current problems in America that have arisen because house prices are falling and whether he has any concerns in relation to the UK housing market.
Mr King replied (uncorrected): "I do not pretend to be able to forecast house prices, and most of those who try to do so have been proved wrong in recent years. If they were to fall by a relatively modest amount then I do not think the consequences would be very severe, because you would find, still, a very small number of households would find themselves in a position where they were described as having negative equity. As long as they go on servicing the mortgage, if indeed they would choose to do so, I do not think there will be any major difficulty. If there was a very large fall in house prices, which I think all of us think is unlikely but no one can rule out entirely, then the problem is much more severe. However, I think it would be wrong to look at it as a problem of housing, because you would have to ask the question: why did the price of houses fall so sharply? In large part, that would have to reflect some other shock to the economy as a whole. We have not seen that so far. If there were a shock to the economy as a whole, obviously, we would take some action to offset that shock but, so far, as I say, the simple-minded, forward projection of house price-to-earnings ratio has not been a very good predictor of what would happen in the housing market. There are very good reasons for that in the last few years: the very low level of long-term interest rates ought to affect all asset prices, and it has, and housing is no exception to that. That would push up house prices. If interest rates were to return to historically more normal levels then all asset prices would adjust, not just house prices, and then that would be a development that we would have to deal with. On the supply side, Kate has drawn attention to some of the difficulties. Again, I think, in any individual market you do not go very far wrong by thinking in terms of supply and demand."
