Kate Barker, a member of the MPC, warned that the drop in property prices and tightening of lending were the biggest short-term threats to the economy.
The Bank admitted that it would not be able to stop this spiral and that the MPC would be paying particularly careful attention to the markets.
Barker explained: “The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil.
"If credit tightening were to prove more severe than in the MPC’s present central projection, leading to a significant fall in lending to households and companies, this could prompt a further decline in property values.
“While the outlook for house prices is always highly uncertain, it is likely that prices will decline in the short term relative to earnings, and falls in nominal terms cannot be ruled out.”
Barker added that even if house prices fell by 15 per cent, 5 per cent of mortgage holders would hit negative equity.
Barker admitted the securitisation freeze would restrict the quantity of mortgage lending in 2008, and said: “In this case, the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders’ balance sheets, reducing lending capacity further.”
Ross Bowen, managing director of Connells Survey & Valuation, said: “The housing market remains quiet and the MPC must remain focused to stimulate growth.”
