–House Market In Midst Of A Difficulty Transition
–Recalibrating Bank-Mgage Rates Will Be ‘Tricky’, Will Take Time
–Not A Simple One-Off Recalibration Between Bank Rate-Mgage Rates

LONDON (MNI) – The UK house/mortgage market is likely in the middle
of a difficult transition to a more sustainable situation rather than
in a permanently bad new equilibrium, Bank of England Monetary Policy
Committee Member David Miles says today.

This transition will require the MPC to recalibrate the link it
assumes between official policy reference rates – like Bank Rate – and
mortgage rates.

In a speech to the Home Builders’ Federation here, Miles says that
the spread between Bank Rate and the average cost of mortgage finance
will likely be higher than it was in the past:

“It is also likely that the average spread between the interest
rate on mortgages and a reference rate like Bank Rate will be different
– and quite likely higher than it was just before the crisis. That does
create an issue for the MPC. We need to re-calibrate the link between
Bank Rate and the cost of debt to finance house purchase”.

This recalibration, Miles says, will be tricky in practice – and
will take time:

“In principle this is not a great problem. In practice such
calibration is tricky and that spread between the rate we on the MPC set
and the average cost of mortgage debt is likely to take time to change.
So it is not a simple, one-off re-calibration”.

“It is not at all clear how this will play out and over what
horizon. As it plays out the link between the decisions the MPC make
each month on Bank Rate and the impact on the economy will change. In
the longer run it is not clear it makes life more difficult. But today
we are still in the middle of a transition and it is a difficult one”.

But Miles expressed some optimism that the mortgage market is
seeing some improvement:

“In the mortgage market it may look like we have taken many steps
back. I think that is too pessimistic. I believe it is more likely that
we are taking some difficult steps forward”.

But the recession had wrought greater-than-usual turmoil on the
housing market, Miles said:

“But the impact on the housing and mortgage markets over the past
few years has been greater than is usual even in a bad recession – even
a recession that has been as deep as we have seen”.

In other comments in the speech, Miles – who has acquired a
slightly dovish reputation – noted that the UK had been through an
“exceptionally severe recession”:

“Output has fallen very sharply and unemployment has risen a great
deal. Confidence about the standard of living we might expect for our
future selves and our children has been shaken”.

–London newsroom 0044 20 7862 7499; email: ukeditorial@marketnews.com

[TOPICS: M$$BE$,MT$$$$]