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Re: Chancellor's warning to homeowners as IMF predicts devastating crash
The Chancellor rebuked mortgage lenders yesterday for fuelling an 'unsustainable' boom in house prices.
In an exclusive interview with the Daily Mail, Alistair Darling said banks and building societies must be more responsible with their lending.
Predicting a 'slowdown' in the property market, he urged them to be more cautious about how much they lend and take more account of whether the borrower is able to pay back the loan.
His stern message coincided with a warning from the International Monetary Fund that Britain's economy, with its heavy reliance on property, was hugely susceptible to a housing-market crash. Mr Darling said he believed a fall in house price inflation was both desirable and likely.
'An unsustainable house price inflation is not good for individuals, is not good for the economy, so I think it will slow down,' he said.
In a wide-ranging interview, the first since he delivered his controversial 'magpie' Pre Budget Report last week, the Chancellor left little doubt about his irritation with the home loan providers. He demanded that they ask 'more searching questions' to prevent borrowers overstretching themselves.
Last year Abbey, Britain's second biggest lender, changed its rules allowing it to grant loans of five times the borrower's salary, and sometimes up to seven times.
Other lenders, such as Northern Rock and the Halifax subsidiary Birmingham Midshires, were willing to lend 125 per cent of the value of a home. Darlington Building Society offered up to six times salary with its Income Stretch deal.
The Financial Services Authority has also warned that one in ten homebuyers is taking out an interest-only mortgage.
These are popular because the monthly payments are cheaper, but a buyer must repay the original capital sum when the loan ends. The FSA said ten per cent of interest-only borrowers have no idea how they will pay back the money when the time comes, with many simply relying on a buoyant housing market to add equity to their home. Mortgage brokers have also been encouraging homebuyers to lie about their finances to qualify for huge mortgages up to eight times their salary.
'I think that lenders need to be clear that firstly somebody can afford to meet the repayments whatever they are - that they haven't overstretched themselves,' said Mr Darling.
In the early 1990s house prices crashed leaving borrowers with mortgages which were larger than than the underlying value of their homes leaving them in what became known as negative equity. 'If lenders take a more robust view of what they are doing that's not a bad thing at down but that is a relative thing because it has been growing so strongly.'
Clearly, the American 'trailer park' mortgage market which started the credit freeze which brought Northern Rock down has given the Government pause. The impact of the U.S. housing collapse and the emerging problems in Britain is evident today in the latest authoritative forecasts from the Washington-based IMF. It said house price rises in the UK, Ireland and Spain had been surging even faster than those in the U.S. before the recent market collapse, making these countries particularly vulnerable.
'Could a housing correction in western Europe be as deep as in the United States?' asked the IMF report. Its analysis 'suggests that house price overvaluation may be considerably larger '¦ and there would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch'.
Forecast growth for the leading Western economies has been downgraded from 2.7 per cent to 2.2 per cent next year, with the U.S. barely expanding enough to hold down unemployment. The IMF says that UK output will expand by 2.3 per cent against a spring forecast of 2.7 per cent.
Mr Darling, who is heading to Washington for his first meeting of the Group of Seven richest countries tomorrow, says he will be pressing fellow finance ministers and central bankers for financial market reforms in the wake of the American subprime crisis and the Northern Rock fiasco. 'We have to make sure we have a far better surveillance system to spot these problems and take action to head them off,' the Chancellor argued.
In contrast to the IMF, the Chancellor is hopeful that even if house prices start to slow or even fall, we are not heading for an early 1990s style crash.
'I am confident we can get through this, but we are going to go through a turbulent period,' he said. 'That is why I downgraded my expectations for growth quite sharply because of what is happening in the United States and in Europe as a whole.'
He does believe that over the longer term there could be a correction in the housing market but it will take place in a orderly manner. 'What you want to avoid is a very rapid unplanned adjustment,' he said.
Re: Chancellor's warning to homeowners as IMF predicts devastating crash
The US and the UK need to just let the housing market collapse. Yeah, it'll be bad and a lot of people will lose their homes, but the longer they delay the inevitable, the worse the disaster will be. The market needs to collapse so it can start to correct itself. Just like how the US economy badly needs to go into a deep recession so the economy can get on a path towards recovery.
The world is in for a bumpy road ahead.
