Greenspan Forecasts Problems For the UK : Credit Card Guide

Greenspan Forecasts Problems For the UK

Alan Greenspan, the former head of the US Federal Reserve, is forecasting a bleak few years for the UK housing market. As a result of rising interest rates and the credit crunch, the housing market in this country is heading for a painful correction.

The warning followed hard on the heels of Northern Rock going cap in hand to the Bank of England (BoE). The UK’s fifth largest mortgage provider was in danger of running out of cash until the BoE agreed to help it out.

Mr Greenspan also believes that the UK economy is more exposed than that of the United States to financial turmoil. He warns of difficulties ahead for home owners, and believes that inflation will increase dramatically in the next few years, more than doubling from its levels of around 2% to 2.5% in recent years. He also has a very bleak outlook for interest rates, saying that they may have to hit double figures in coming years in order to try and keep prices down. Mr Greenspan also had a shot at Britain’s education system, saying that it would need an overhaul if it was to keep up with other vibrant economies in the world.

The slim piece of good news was that Mr Greenspan reckoned that Britain will be one of the best performing Western economies – mainly thanks to the reforms of Mrs Thatcher during the 1980s, and the strength in the City.

The good news may be lost in the dire warnings. Recent price increases in London and the South East were unsustainable, according to the 81-year-old economist. The boom, he said, could not last; mortgage rates are already on the rise, and teaser rates are disappearing. Banks are being forced to write-off billions of pounds of debt. “It’s going to turn,” he said. “It’s got to turn.”

Britain’s higher exposure to financial turmoil was due to the high number of adjustable rate mortgages in the country. As the rates increase – for loans as well as mortgages – so would households’ spending power be cut. Since August 2006 the BoE has increased the base rates five times, to take it from 4.5% to its current level of 5.75%. Worse, for the millions of mortgage holders in the UK, the effective rate they pay for their mortgages has actually gone up much higher – to levels last seen when the Bank rate was a whole point higher, at 6.75%. Mr Greenspan said that the housing market in the UK had not yet turned, but households were more susceptible to interest changes than the US.

UK banking is reaching crisis point. With the problems at Northern Rock, millions of customers literally queued overnight and round the block to try and withdraw their savings. First the bank said their savings were safe, but the queues grew and the share price dived. Then the government stepped in to guarantee savings: the queues died down and the share price made a recovery, but it’s not over yet for Northern Rock. Even more worrying is the concern for other banks. How long is the list of banks that might have similar problems?

Tom Smith
27th September 2007

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