report on the housing market that, if we wanted to reduce the trend in annual real house price growth to 1 %, we needed to build an additional 120, 000 private sector homes annually in england, an increase of almost 100 % relative to the 2002 – 3 level. in the end, and despite a credit boom, the increase in annual housing completions up to the crisis was only 25 %. bis central bankers ’ speeches there are many reasons for the failure of the supply of housing to keep up with demand in the uk which go well beyond the remit of a central bank. but the effect is that when demand grows strongly house prices can keep rising quickly for a long time. this is a movie that has been seen more than once in the uk. so it is not surprising, given the history of our housing market that the recent sharp increase in house prices and transactions appear to have fuelled growing expectations of an ever accelerating market. contrary to the received wisdom in the rest of the world, the strength of housing market rather than the weather may be the dominant topic of conversation in the uk. with the possible exception of australia, i don ’ t know if any other country has a word for “ gazumping ”. in april, over 500 newspaper headlines referenced house prices, around two thirds more than the total seen in that month last year. central banks are very well aware of the impact that expectations about prices can have in the generation of inflationary pressures across the economy – the way in which expectations of future prices increases or decreases change people ’ s behaviour and actions. and while inflation expectations in the uk are generally well anchored around the mpc ’ s 2 % inflation target, it is a very different story when it comes to expectations for house prices. though expectations for sharply rising housing prices are not an issue of inflation pressure generally, they can matter a lot for the actions of people and the choices they make. expectations of a fast rising market put pressure on potential buyers to get into the market as quickly as possible for fear of being priced out. and on sellers to delay and ask for higher prices. and expectations of future increases in the value of homes can make people more willing to take on debt to get on the ladder or to reach for that next rung. it is difficult to know how much expectations are driving the current market. but there is good reason to believe that a mutually reinforcing combination of strong demand, weak supply and expectations of a rising market could lead to

levels of mortgage debt relative to household income. the current exceptionally low level of interest rates will need to increase once the recovery is well established. so it is particularly important at present to ensure that the current low levels of interest rates do not mask the likely cost of mortgages and so create more headroom for prices to rise. it is possible that affordability constraints, reinforced by lenders ’ underwriting standards, will increasingly act as a brake on the speed at which house prices are growing and as a brake on mortgage debt. in that case, having recovered much of their fall following the crisis, we will see house price growth slow to match the pace of earnings growth – a soft landing. this is not without precedent. in 2004, having risen at an average rate of almost 20 % over the previous 2 years, house price growth began to slow with the annual growth rate falling to just 2 % by the middle of 2005. the 125bps increase in bank rate in the 13 months to september 2004 was no doubt part of the story. it proved, however, to be short lived episode. amid a period of easing credit conditions, the pace of house price growth began to rise again through 2006, reaching double - digit rates by 2007. but it is probably an example of how affordability can brake the market. however, there is another way the story can play out – a major overshoot in prices and build up in debt followed by a sharp correction with negative equity and an overhang of debt for many households. the trigger for the correction can vary – in the early 89 – 92 episode it was a sharp rise in interest rates as the uk sought to remain in the exchange rate mechanism ; in 2007 – 9 it was a sharp tightening in credit conditions amid a collapse in confidence in an over - levered banking system – but, unfortunately, there are more precedents in uk for periods of a rapidly growing housing market to end in this way. the question for the financial policy committee, therefore, is whether the sustained momentum we are seeing in the housing market will continue and will lead to unsustainable growth in household indebtedness, undermining the resilience of the system. our first thought must be to the direct exposure of the financial system to the housing market and its resilience to a major housing shock. mortgage lending amounts to two - thirds of uk bank and building societies ’ uk lending. financial institutions are better placed now than they were before the financial crisis.