Ex-BOE's Julius Opposes U.K. Home Market Intervention

By John Fraher

Sept. 9 (Bloomberg) -- Former Bank of England policy maker DeAnne Julius said Prime Minister Gordon Brown shouldn't try to shore up Britain's housing market even though property prices are likely to fall further.

``It would be counterproductive at this point for the government to step in and try to prevent that correction from continuing,'' said Julius in an interview with BBC Radio 4's Today program today. Home values ``will probably have to fall further.''

Brown's government is considering proposals on how to revive the country's mortgage market as falling house prices erode support for the ruling Labour Party. A Treasury-commissioned report said in July that the Bank of England could extend its Special Liquidity Scheme helping banks hurt by the credit crisis, or Brown could guarantee mortgage-backed securities.

Chancellor of the Exchequer Alistair Darling is scheduled to make a decision on the proposals, made by former HBOS Plc Chief Executive Officer James Crosby, in coming weeks. His U.S. counterpart, Henry Paulson, was forced on Sept. 7 to seize control of Fannie Mae and Freddie Mac after the housing slump threatened to topple the companies making up almost half of the U.S. home- loan market.

British house prices are falling as banks stung by the credit market rout hold onto their cash, making it harder for potential homebuyers to find mortgages. The Royal Institution of Chartered Surveyors said today that sales fell to a record in August, with some respondents saying they had sold less than one home per week.

Recession Risk

The housing-market slump has helped push the economy towards a recession. The U.K. statistics office said today manufacturing production declined in July to the lowest level in 1 1/2 years. The pound, which was little changed after today's reports, has dropped 11 percent against the dollar in the past month.

Julius said she expects the U.K. economy to be ``slow or flat'' for the next 12 to 18 months, though it will probably avoid the ``deep recession'' experienced in the early 1990s.

While Brown is under pressure from his own party to turn around the government's fortunes, further efforts to rescue the housing market may face opposition from Bank of England Governor Mervyn King.

He has already rejected any government support for mortgages, saying last month ``the last thing we want to do is to tell lenders it doesn't matter if they monitor the riskiness, the government will guarantee it.'' Crosby also warned in his report, which weighed the pros and cons of the various options, that such a move risks creating ``moral hazard.''

`Trade Off?'

``Government intervention has its own weaknesses and its own risks,'' said Julius. It involves a ``trade-off'' between taxpayers and special interests, she said.

The Crosby report said one option would be for the central bank to expand its Special Liquidity Scheme, due to expire next month, by accepting mortgage-backed securities issued this year. The Bank of England in April only agreed to accept securities issued before 2008 in return for government bonds.

Willem Buiter, another former Bank of England policy maker, argued today that Brown's government must do something to help unfreeze the mortgage market.

Policy makers should offer a ``liquidity-support facility even for newly issued mortgage-backed securities, but do it at a price that makes banks and other mortgage lenders wince,'' Buiter said in an interview with CNBC television. ``They have to actively try to reinvigorate the securities market for mortgage finance.''

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net