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Economist warns UK is at risk of housing crash

THE UK is stoking a property mini-boom and faces a housing crash in the next parliament, economist Roger Bootle has said.

Mr Bootle, of Capital Economics, told the second day of the National Association of Pension Funds investment conference in Edinburgh that house prices would continue to rise, and positive measures of affordability ignored the fact that interest rates were so low.

"The issue will come when interest rates rise - at 6% or 7% mortgage rates, housing will be extremely expensive." He said four or five years ahead, when interest rates rise "we are going to get a housing crash with dire consequences". But rates would not even begin to rise until the end of 2015, and then very slowly, he said.

"They will be really seriously loath to raise interest rates too early, it is the mistake they want to avoid, and the peak will be something like 3-4%."

Mr Bootle said like the US, and unlike the eurozone and Japan, the UK should be able to grow its way out of debt. "I think the UK prospects are relatively benign," he said.

The lurking danger was that in the event of another crash, deliberate inflation rather than austerity would be seen as the way out, but the economist did not believe that quantitative easing would fuel inflation as it could be "easily reversed" -by freezing bank lending.

Mr Bootle said that on cyclically adjusted measures, UK equities looked "relatively good value" in their own historical terms.

He added that exiting the EU would not damage the UK's prospects, because free trade agreements would compensate. "I am quite sure it would continue to be able to prosper," he said.

In another session, the conference reflected the industry's resistance to a pension charge cap, proposed in principle by minister Steve Webb and his shadow Gregg McClymont but deferred until next year.

Simon Chinnery, of JP Morgan, said the Government had set out six principles of good DC (defined contribution) pensions for auto-enrolment but only one, cost, was attracting attention. "We are right down a deep rabbit hole and all we are talking about is pricing," he said. "Price controls do not work, they have never worked. The danger is we end up talking about the price of everything and the value of nothing."

Mr Chinnery said: "We are quite battered at the moment and under the cosh, but we are trying to design the best stuff for as many (people retiring) as possible, with a focus on income replacement, and that is a worthy cause."

James Churcher of consultants Abbott Laboratories, said a charge cap, which would "stifle innovation and creative ideas", was getting confused with charge transparency, which was desirable.

He said: "It can't make sense that we tell people there is an AMC (annual management charge) of 0.5% and don't tell them there are other charges."

He said all charges should be either clearly disclosed within a new total expense ratio, or absorbed within a stated AMC.

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