Foreign exchange may be greater risk than UK housing

The dollar's slide late last year may have overtaken house prices as the most important asset price development facing the Bank of England, Monetary Policy Committee member Kate Barker said on Monday. In a speech to the Institute of Economic Affairs, Barker offered few new clues on what the next move in interest might be, and repeated the central bank's forecast that house prices were much more likely to fall somewhat than rise significantly.
But while the housing market and its effect on consumer spending remained a key issue for the bank's Monetary Policy Committee, Barker said it was far from being the dominant one, particularly given how sharply the dollar fell in the last few months of 2004.
"The housing market is far from being the dominant issue. It is perhaps not even the most important asset price, in the light of the significant decline in the dollar's effective rate in the fourth quarter of last year," she said.
Policymakers around the world have become jittery about the US currency's decline in recent months as it hit a record low against the euro in December, although it has since made up some ground.
Barker said that it was also easier to react to house price developments than those in currency markets, which were more volatile.
"Past experience suggests that house price movements in one direction over a quarter are more often than not followed by a further change in the same direction," she said. "So it can be clearer how account should be taken of news in the series, whereas exchange rate changes are likely to contain more noise."
Barker noted that the MPC's central forecast was for house prices to fall modestly for a period, but admitted this remained only one of a wide range of possibilities, given the tendency of asset prices to overshoot significantly in either direction.
"In view of the evidence on affordability, and the balance of arguments over overvaluation, the likelihood of some decline in house prices, at least relative to earnings, seems now to be much greater than that of a significant increase," she said.