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Alan Greenspan warns of UK house prices
drop
Edmund Conway
London
Telegraph
Monday September 17, 2007
Britain's housing market is heading for a painful correction,
according to the world's most renowned economist and central banker.
Alan Greenspan, the former head of America's central bank, the
Federal Reserve, issues the prediction in an exclusive interview
with The Daily Telegraph today.
He warns of "difficulties" ahead for UK home owners,
as rising interest rates bring house price growth to a shuddering
halt.
The warning comes only days after the Bank of England was forced
to bail out the mortgage lender Northern Rock, amid the escalating
credit crunch in the City and markets around the world.
Mr Greenspan, the central banker for a number of United States
presidents from Ronald Reagan to George W Bush, also says that
Britain's economy is even more exposed to the financial turmoil
than that of the US.
(Article continues below)
In a wide-ranging interview he also warns that:
• Inflation will pick up dramatically over the coming years,
as much as doubling from its recent lows.
• Interest rates may have to hit double figures in the
coming years to keep price rises at their current low levels.
• Britain must overhaul its flagging education system or
risk being left behind by other vibrant economies around the world.
However, Mr Greenspan provides some reassurance about Britain's
prospects in the coming decades, saying it will be one of the
best-performing Western economies, thanks to the Thatcherite reforms
of the 1980s and the strength of the City.
The UK "may be one of the most competitive economies in
the world", he adds. However, it is Mr Greenspan's warning
on housing and interest rates that will cause most consternation.
The 81-year-old economist, an adviser to Gordon Brown, said that
recent increases in house prices - particularly those in London
and the South East - were unsustainable.
"There are going to be some difficulties," he says.
"Can [the boom] last No. You're already beginning to see
the mortgage rates are moving; a lot of the two-year fixes are
beginning to unwind, and the teaser rates are going," he
adds, referring to mortgages where rates jump after an introductory
period.
He says that banks are already being forced to write off billions
of pounds of debt.
"It's going to turn, it's got to turn," he says.
Mr Greenspan also warns that Britain is more vulnerable to the
effects of the credit crunch than the US.
"Britain is more exposed than we are - in the sense that
you have a good deal more adjustable-rate mortgages," he
says, referring to the standard variable rate loans that many
households have chosen over fixed-rate deals.
The Bank of England has raised interest rates five times in the
past year to their current 5.75 per cent.
However, the instability in money markets has meant that the
effective rate paid by millions of families - the so-called standard
variable rate - has actually risen to heights it last hit when
the Bank rate was a full percentage point higher at 6.75 per cent.
"In Britain the housing [market] hasn't turned yet, and
the consumer households are more subject to interest rate changes
than in the United States," he adds.
His warning comes with the UK banking system in a state of crisis.
Worried customers have withdrawn £2bn from their accounts
with Northern Rock since Friday, when it emerged that the high
street bank has had to arrange an emergency loan from the Bank
of England to prevent it from collapsing.
There are also growing signs that after a decade of almost uninterrupted
growth the housing market is slowing dramatically. Rightmove and
the Royal Institution of Chartered Surveyors have reported a sudden
dive in prices.
Although he expects the housing market to take a turn for the
worse, Mr Greenspan says the UK economy is well placed to deal
with shocks, because the reforms following the miners' strikes
in the 1980s made it a more flexible place to do business.
"You [in the UK] haven't even had a taint of a recession
for an extremely long period of time – and a goodly part
of that is the flexibility that came out of the crush between
Scargill and Thatcher," he says.
"That was the defining moment, and to their credit Blair
and Brown did not endeavour to unwind it. They recognised that
there was something fundamentally good for British labour in having
a flexible economy.
"It's like tough love, as we call it. It's unhappy-making,
but in the end it works."
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