The era of booming house prices and low inflation could be coming to an end, according to an ominous warning from the Bank of England.
In an unusually strong alert, the normally cautious central bank said: “We cannot guarantee that the next ten years will be so ‘nice’.”
The Bank’s warning, contained in a memo submitted to the Treasury Committee, could signal the start of rampant inflation and soaring interest rates.
It follows an open letter from some of Britain’s leading economists this week warning interest rates may have to climb as high as 7.5 per cent. Such a move would be a savage blow for homeowners who have stretched themselves to the limit to buy at today’s sky-high property prices.
It also comes the week after the cost of living shot to 3.1 per cent, its highest level for 15 years and far above the Government’s two per cent target.
Rampant inflation means an interest rate rise - the fourth in less than a year - is almost guaranteed next month. It is already at a six-year high of 5.25 per cent.
In its memo, the Bank of England said the past decade has been unusually ‘nice’, an acronym for ‘non inflationary consistently expansionary.’
Dubbed ‘The Great Stability’, inflation has been as low as 1.1 per cent and interest rates have been as low as 3.5 per cent.
These conditions have fuelled a boom for Britons with house prices rising and inflation being too low to worry about.
But the Bank’s note warns that this ‘benign’ economic background could be about to come to an end.
The Bank’s memo also raises fears about the huge debts, including ‘super-size’ mortgages of more than £150,000, which people are taking on.
Britain’s debt mountain has ballooned to a record £1.3 trillion, compared to just £500 billion when Labour came to power.
It said: ‘There is more evidence to suggest that the level of unsecured debt might be presenting problems.’
Unsecured debt includes credit card borrowings, overdrafts and personal loans. Secured debts are mortgages and other borrowings ‘secured’ on a person’s property.
The Bank said its annual survey suggests around a third of unsecured borrowers find their debt ‘a burden.’
It added that young people are having to take out ‘larger mortgages’ in order to climb onto, or up, the property ladder.
The warning comes in the week that official figures show about £1 billion every day was handed out in March in a record-breaking mortgage boom.
This is equal to about £42 million every hour, with people borrowing record mortgages to buy at today’s prices.
The average house price is over £200,000 in Britain, but economists fear the decade-long boom could be about to come to an end.
A former Government adviser, David Miles, chief UK economist at the American investment bank Morgan Stanley, said yesterday that a fall is likely.
He said: ‘Falling real house prices at some point are very likely but timing is somewhat difficult to predict.’
Another economist, Ed Stansfield from Capital Economics, said house price falls in London next year are ‘not impossible to imagine.’
A fall would be a sharp shock for Londoners, with thousands in the capital becoming ‘property millionaires’ as a result of soaring prices. In one exclusive borough, Kensington and Chelsea, asking prices rose more than £120,000 between March and April to a record £1.3 million.
In a welcome reprieve, the Bank’s governor Mervyn King said yesterday he expects inflation to fall in the short-term.
Giving evidence to MPs on the Treasury Committee, he said he expects ‘quite a sharp fall back in inflation in the next four to six months.’
Amid fears that inflation is spiralling out of control, he insisted the Bank is ‘completely determined’ to bring inflation back to its target of two per cent.
The Bank said economic conditions had been so good that Britain had benefitted from the ‘beneficial tailwinds’ of globalisation and high employment.
George Osborne, Shadow Chancellor, said: 'Since the early 1990s, the whole world has enjoyed low interest rates and inflation thanks to the rise of countries like China.
'Gordon Brown should have used this unique period to prepare our economy for more stormy times ahead by creating a simple and competitive tax system, less regulation and reformed public services.
'Instead he blew the chance and leaves Britain less prepared for an uncertain future than it should be.