Housing crash could see interest rates below 3.5%

08 July 2004
A housing market crash could see the UK's rate of borrowing drop below 3.5 per cent, but might not send the UK into recession.

That is according to new research from Oxford Economic Forecasting.

The UK is far better placed to withstand a housing crash now than it was in the early 1990s the think-tank predict. It points out that then monetary policy was held back by double-digit inflation.

The OEF suggests that the main area affected by falling house prices would be household wealth. Housing currently represents about £3 trillion to the nation's assets, this is far larger than the reported £1 trillion consumer debt.

As such any drop in house prices would lead to a drop in equity withdrawal and so depress consumer spending. There is also evidence that a fall in the housing market would hit consumer confidence, as well as bank balances.

But the OEF predict that if the Bank's interest rate setting Monetary Policy Committee react quickly and aggressively to a housing crash, there is no need for a repeat of recession of the early 1990s.

However, the research also carries a warning.

If the MPC does not react to falling house prices economic growth could fall to just 0.7 per cent by 2006. But if the Bank does act, even with a ten per cent fall in property prices, economic growth could be 2.4 per cent - more than three times what is predicted if the MPC remains passive.