Memo to the Bank of England

Memo to Bank of England – 31st August 2006

Today the Nationwide building society announced yet more sharp increases in house prices in the UK. The Nationwide noted that the recent increase this month by the Bank of England had little or no effect in cooling the property market.

Nationwide, the largest building society in the UK announced that property prices had leapt another 0.8 percent in August, bringing annual housing inflation to 6.6 percent – the fastest growth rate for one and a half years.

Fionnuala Earley, Nationwide’s group economist stated that ‘while we expect base rates to reach 5 percent by the end of the year, above the peak of the last rising cycle, we do not expect the market to slow as sharply as before.’

She outlined a few reasons; the fact that fewer rate rises were expected, the fact that fixed mortgage rates have moved more gradually and strong demand from the overseas investment sector.

It seems that the London property market in particular has become a ‘safe harbor’ for foreign cash over the last few years. In many parts of London houses are lying empty as foreign capital seeks investment opportunities driven by one of the few, still rising markets. Pity the poor Londoner, who is now suffering from the same problem they bestowed upon the country with second homes.

The current wealth in the economy is driven by debt based on asset price increases – at some point something will give.

Housing industry is defiant about the courage of the Bank of England to do something about the increases – even openly taunting the Bank.

Some are now calling for a bigger rise than expected, a shock to the system that will halt the inflationary growth in property prices in its tracks, now.

Memo ends