The Bank Of England's Celebrity Advisor

[Caligari]

Forget the staid image of bankers in starched collars

- the Bank of England has got a celebrity advisor on

board.

- Fresh from a talk by Stephen Nickell, one of the nine

members of the bank's interest-rate setting committee,

MoneyWeek can exclusively reveal the identity of this

great economic mind.

- It's Phil Spencer.

- Yes, that Phil Spencer. Estate agent Phil Spencer of

Kirsty'n'Phil fame - the duo that present all those TV

shows that tell you how property can only go up, and

that a flat in the bullet-riddled wastelands of inner

Nottingham is a good investment.

- Professor Nickell, one of the Monetary Policy

Committee members who voted for a rate cut in August,

was arguing that there wouldn't be a property crash -

because there probably hadn't been a property bubble in

the first place.

- So the 123% rise in house prices between mid-1999 and

mid-2004 wasn't a property bubble? No, says Professor

Nickell, because this time it's different.

- He mentioned the standard property bull arguments

that higher divorce rates and immigration, more double-

income households, and lower building rates had pushed

up supply relative to demand, though admitted this

would only account for some of the rise.

- A bigger effect came from low inflation and low

nominal interest rates meaning that people could afford

to borrow more, pushing up the amount they spend on

houses.

- Some might argue that if lower interest rates push up

house prices so drastically, that might mean the Bank

of England should take some responsibility for not

acting to prevent such an unsustainable rise - but not

Prof Nickell. According to him, it's not up to the bank

to target asset bubbles - even if there was a property

bubble in the first place.

- But Prof Nickell's clinching argument against a house

price crash was that it still hasn't happened. In fact,

he said, even though house prices "more or less"

stopped rising in July 2004, "one pundit felt able to

remark by November 2004 that 'public sentiment has

finally accepted there will not be a crash'". That

pundit was Phil Spencer.

- We can't be the only ones slightly concerned that

someone with his hand on the UK's economic tiller is

relying on the UK's biggest property bull to back up

his opinions on the housing market.

- Here at MoneyWeek, we prefer to back up our take on

property with concrete evidence - so let's look at the

latest statistics.

- The Royal Institution of Chartered Surveyors reported

this month that house prices kept falling in August. In

fact, according to RICS, prices have been falling for

more than a year now, which suggests Prof Nickell's

assertion that there are no signs of a crash is a bit

short-sighted.

- But to be fair, the group also saw buyer inquiries

rise by the most in over a year. And the Council of

Mortgage Lenders reported a pick-up in the number of

mortgages taken out in August, to 101,000 from 96,000

in July.

- So is Prof Nickell right? Should Phil Spencer be the

next addition to the MPC?

- We don't think so. One fresh piece of evidence comes

from the team at Capital Economics, who have literally

been scouring the gutters.

- By looking at the August data on drainage searches,

which buyers tend to commission when they are serious

about buying a property, they believe that increased

buyer interest is unlikely to translate into higher

sales. The number of searches fell 10% on July, a

bigger slump than at the same time last year, when the

housing market first started to cool off.

- But if you really want to know about house prices,

just look around your local area. At MoneyWeek, we know

for a fact that prices have fallen by about 20% in

Docklands. And just this week we received a letter from

a reader, who decided to sell their home to rent in

mid-June last year. They put it on the market for

£310,000, but didn't manage to sell until March this

year - at £249,950. That's 19% down on their asking

price.

- That house was on the market for nine months before

the sellers decided to take the hit. How many more

people are sitting on their homes in the hope that

things will pick up again? And what will happen to the

market if they don't?

- The sellers managed to break even, but are now

thanking their lucky stars they're renting and not

buying. We recently published a very in-depth piece

from Capital Economics on the costs of renting versus

buying - if you missed it, you can read it here:

http://www.moneyweek.com/article/1316

- Our editor-in-chief, Merryn Somerset Webb also has

some choice words to say about the concept that renting

is 'dead money' - you can read those here:

http://www.moneyweek.com/article/1261

- Prof Nickell's speech came just ahead of the latest

minutes from the Bank of England's September MPC

meeting. The vote to hold rates at 4.5% was unanimous,

which the market had expected, with the MPC caught

between rising inflation and shaky economic growth.

[NormanLamont]

I must admit i find it quite amazing someone on the MPC going on record saying this. Surely a 'professor' might be more intelligent than to go on record with that, but then again i guess thats VI for you

[BandWagon]

Ok, here's my piece on Prof Nickell.

You guys may be aware that interest rate policy is a very blunt instrument. Right now in the UK we have manufacturing in recession (which has lasted for many years), while parts of the service industry (particularly financial) are doing very well. The old two speed economy.

So about a year ago old Merv tried to use another method to slow the housing boom, he warned people that house prices may fall. This had a complimentary effect to raising rates, and meant that the MPC could go a little easier on manufacturing.

So now we have the opposite case. House prices are falling (and quite hard in some areas), but the MPC don't want to cut rates because inflation is rearing it's ugly head.

So here we have Prof Nickell, doing his bit for the country, and telling us that housing is doing Ok.

Isn't that great?

Edited September 24, 2005 by BandWagon