The business - Patrick Hosking finds the Bank wrong on house prices

The Bank of England seems incapable of understanding the boom in house prices. Worse, it isn't warni

Jonathan Compton is an unlikely City rebel. The former stockbroker has made his pile working for big establishment names such as Barings and Credit Lyonnais. He once confessed to me that he had built up a personal portfolio of 14 properties simply by using his annual bonuses. A bad year would yield a modest flat, a good year an entire London house.

But you have to admire his chutzpah in exposing the fat fees and spineless investment philosophies of the big City investment houses. Compton's sandwich-board men have been parading outside the offices of Cazenove, Merrill Lynch, Schroders and other firms that invest the nation's pensions and ISAs, with slogans such as "They're bleeding you dry".

Compton has his own agenda. He is drumming up publicity for his own new fund management firm, Bedlam, so-called, he says, because of the insanity of the entire industry. Bedlam, he claims, will be different, charging clients fees only when they do well. It will also be transparent, actually telling clients what their money is invested in.

He has already caused a stir. Wisely, he has the law firm Mishcon de Reya on standby as he accuses the industry of "ignorance, duplicity, greed and deception". The Investment Management Association, an industry body, has rather lamely responded by accusing him of spreading scare stories.

But Compton is only spelling out what we already know - that fund managers, on the whole, do worse than a monkey with a pin and the FT share prices page. And they charge heavily regardless of performance. Bedlam is not entirely squeaky clean itself. Its "no win, no fee" promise applies only to distinct quarters. So, in theory, it is possible for Compton to collect fees for the occasional good three-month period while his clients lose money over the long term.

Even so, he deserves a following wind, especially for saying what the industry knows in its heart to be true. Bedlam's biggest backers are - you've guessed it - rival fund managers, investing in a personal capacity, of course.

There were a few burnt fingers in the money markets the other day when the Bank of England wrong-footed dealers by leaving interest rates unchanged. Most had expected a cut and many had bet on it. The Bank decided on no change, not least because it was privately alerted by the Halifax to a rise in house prices of 31 per cent - a speed not seen since records began in 1983. The house price figures will have shocked the Bank, which has shown itself incapable of grasping the scale of the house price boom of the past two years.

The nine members of the independent Monetary Policy Committee have done a decent job otherwise, but in this one respect they keep getting it wrong. Month after month, they have wrongly predicted that the growth in house prices is about to ease.

In May 2001, they admitted that house prices were rising faster than expected but still forecast house prices would rise only "a little faster than earnings over the next two years" - in other words, by about 4 or 5 per cent a year.

In November 2001, they were still playing down the housing market, pointing to "tentative evidence that annual house price inflation may have now peaked" and predicting that it would "ease back in the coming months".

Three months later, they admitted they would have to raise their near-term assumptions but still predicted "a slowdown to around the growth rate of nominal earnings in the medium term".

By May, they admitted that they had been over-optimistic about the hoped-for slowdown in house prices but still assured us that house price inflation would fall over the next two years.

The tone was the same in August, after "a special survey by the Bank's regional agents . . . suggested that more people were expecting the market to slow in the second half of the year".

In September, they pointed to a Royal Institute of Chartered Surveyors survey that implied "the prospect of slower house price inflation than had been seen in the past few months". Even in October, "there were tentative signs that housing market activity was slowing", the Bank was insisting - just weeks before the Halifax bombshell.

The Bank has not been alone. Most of the housing industry has insisted house prices would slow of their own accord. They don't want anyone to come and spoil the party.

It is time for the Bank and the government to wake up. We are in a bubble, a bubble puffed up by amateur buy-to-let landlords and banks ever more willing to relax their lending rules. There are no easy answers. But acknowledging that the resultant economic growth is perilously unbalanced would be a start.

Patrick Hosking is deputy City editor of the London Evening Standard

This article first appeared in the 18 November 2002 issue of the New Statesman, NS Interview - Jack Straw