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Housing market 'like a microwave'
Britain's housing market is like a microwave that turns "from lukewarm to scalding hot in a few economic seconds" a senior Bank of England policymaker warned today.
The remarks by the Bank's chief economist Spencer Dale underline the anxiety in Threadneedle Street that the surge in property prices could lead to an unsustainable property bubble.
Policymakers fear a spiral in debt as households overstretch themselves to be able to buy homes, leaving many at risk when ultra-low interest rates eventually rise.
Mr Dale acknowledged that the thaw in housing transactions after they went into "deep freeze" during the recession was welcome - on a day when official figures showed a rise in house building helped the construction sector return to growth in October.
But he made clear that the Bank was alive to the risks, echoing remarks by Bank governor Mark Carney that it is prepared to intervene in the housing market should it appear to be running out of control.
Latest figures from Halifax showed house prices surged by 7.7% annually in November, the fastest rate in six years.
In a speech to business leaders in Newmarket, Mr Dale said: "A healthy housing market is good for our economy and supports the recovery.
"Most importantly, it will underpin further increases in house building, which has played an important role in driving the economic growth we've seen this year and which, as a nation, we need to see.
"But let's not be naive. Anyone with more than a passing interest in British economic history is aware that the UK housing market has a sort of microwave type quality to it, with a tendency to turn from lukewarm to scalding in a matter of a few economic seconds.
"The Bank is fully aware of this risk. The good news, however, is that it's far better equipped to respond to these type of risks than in the past."
The Bank's new Financial Policy Committee (FPC), which oversees the resilience of the financial system, has powers to curb "potential excesses in the property market...which pose a threat to the stability of the financial system", Mr Dale said.
Last month, the Bank tried to put the brakes on the property market when it said a joint initiative with the Treasury to encourage mortgages would be scrapped - though the Funding for Lending scheme incentives for loans to business would continue.
The FPC is also creating a new power for regulators to be able to vary the affordability criteria that home buyers must meet, to ensure that they can afford to service mortgages if interest rates rise.
It has also said that it could force lenders to hold more money on their balance sheets in order to dampen down an over-heated market.
Meanwhile, Mr Dale indicated in his speech that interest rates would stay low even when unemployment falls to a 7% threshold set by the rate-setting Monetary Policy Committee (MPC). Mr Dale is one of the MPC's nine members.
The committee's current forward guidance policy sets out that it will not even begin to consider raising rates above their historic low of 0.5% until the jobless rate has fallen to that level.
But Mr Dale appeared to go further, telling businesses that even then the economy would need to be improving strongly and real wages - which are currently falling as pay growth lags behind inflation - rising.
He said: "You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we have seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher."