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Chancellor's warning to homeowners as IMF predicts devastating crash
Last updated at 11:22am on 18.10.07
Alistair Darling said banks and building societies must be more responsible with their lending.
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.
Reader views (28)
Surely isn't PFI a mortgage that the nation will have to pick up the bill for. Nobody more so than the government has run up a bill which the nation will be streched over in the future in the belief that the tax payer will pick up the tab. How come the Chancellor can lecture the country on mortages.
- P.Hodges, Nottingham UK
This government are mostly to blame, they knew perfectly well interest rates were going up yet they did nothing to warn people. Debts in the UK are the highest in western Europe and certainly one of the worst in the world. This is typical of labour. We are going in to the mire just like we did in 1979. It took years to get us out of debt. Still people be warned, vote Brown out next time!
- Paul Connolly, Potters Bar, Herts
This Chancellor seems to be even worse than the previous one: you cannot drive an economy by just more administration (HIPS etc.) and taxes here and there!
- Jacqueline, Hampstead, London
It makes you wonder with all this scaremongering by the Government, if they are trying to force a crash in the property market. There has been no sign of one, yet they keep going on about it. Is it because that even with the increasing interest rates (and you cannot convince me that the Government are not pulling the Bank of England's strings on this), people have not reduced their spending. It would suit the Government if there was a crash, as that would make people rein in their spending and would hardly those in Government at all.
- Paul Bradford, Monflanquin, Lot-et-Garonne, France
Headhunter in London. Your comment is typical of those who cannot take responsibilites for their own actions. Have you have "blindly" bought a house or were you forced to? Anyone with any minute intelligence can see that house prices in the UK and especially London are vastly overpriced. House price inflation is a disease. It is a scourge on this coutnry and has left countless millions homeless, with no prospect of owning their own home and left misery in its wake. Bring on the crash and bring everyone back to a level playing field.
- Dan, London
Most people buy homes to live in. There are more people needing homes than homes available. There is no mass unemployment. It is true that the rate of increase has been crazy, but I suspect that the fall will be in the rate of increase, not a drop in the value of property. After all, the value of anything is only what someone else is prepared to pay for it. If they create uncertainty by talking of devastating crashes, people who do not need to move won't. There will be even fewer properties on the market. In any case, Gordon Brown cannot afford to preside over a property crash. There will probably be an interest rate cut soon. I am relaxed.
- Beatriz, London
Good I hope it does crash, how the hell are people supposed to get on the first rung. Greedy property speculators and "buy to let" vermin will hopefully get burnt.
- Debbie, UK
Listen to the pundits. I sold my house in Califonia 2 years ago to a couple who took an interest only loan. Within one month of the sale, the value had dropped $100,000 and since then another $100,000. The same thing will happen in England as the price of houses has rocketed way beyond realistic value.
- David, Costa Rica
Many people who obtained mortgages in the past five years or so would not have got mortgages without inflating their incomes, as the house prices in most parts of the UK have been way above what most people could afford.
I believe mortgage providers turned a blind eye in order to earn quick income by providing large mortgages to people who cannot obtain these mortgages by showing their real income.
The house prices in many parts of the UK are falling. In City Centres (Birmingham, Manchester and elsewhere) large number of newly-developed apartments are empty, as buy-to-let investors (who have gambled and lost money) have abandoned the properties.
I think the housing market boom would not have happened, if banks in the UK had not given easy mortgages. Therefore, a sharp correction is now inevitable.
- Ravi, London
Oh... of course... the current Labour government had nothing whatsoever to do with the 'unsustainable' boom, it's all the fault of those nasty mortgage companies. Er, reality check, is it not the government, through the FSA and Bank of England who's supposed to regulate those companies? If Labour was concerned at any stage in the last 10 years, they could easily have either tightened up capital adequacy limits or introduced salary multiple lending caps. But they didn't, they just let it run and run. If the property market does now crash, Brown and Darling are as culpable as anyone.
- Andrew, London
Well they (the Government) had to pay for the war in Iraq somehow!
Even if it's at the expense of those who voted them in. One wonders if, come the next general election the electorate will remember this...
- Simon Caleb, England
With the IMF and Darling going on about falling house prices it'll become a self fulfilling prophesy! Why have they waited til people have bought at high prices to get themselves on the ladder before issuing these statements and basically potentially bringing about a price crash and all the problems associated with that - negative equity etc. Why didn't Labour bring pressure on lenders at the start of the boom back on 2002 or 2003 for example? It's a bit late to start lecturing home buyers and lenders now!
- Headhunter, London
It might help if lenders were forced to check that a borrower had a repayment vehicle behind their mortgage which they no longer do.
- Peter, Chelmsford, Essex
Yesterday, Labour announced that the mass immigration that they have overseen possibly puts strains on public services and brings stresses and tensions to communities.
Today, they announce that the ridiculous and immoral house price boom of the last 10 years, that Labour has relied on to run the economy, is unsustainable and is not good for individuals, is not good for the economy.
Tomorrow Gordon Brown is to declare that cancer, if not caught in time could be deadly and that English football has not reached the heights of World Cup 66.
- Lb, London
No Baza most were sucked in by the statement of Gordon Brown's when he was Chancellor and that was "No More Boom and Bust" but if many read the small print in some of the media they would know just how many people were losing their houses and businesses were going bust in the last couple of years.
- Pat, Sussex
Baza does have a point, but people have been sucked in by estate agents the government and mortgage lenders/banks who were happy until the subprime issues/credit crunch to pump money out to anyone who asked.
- Ciar, London
So as usual with this government it is everybody else that is at fault but not them. But who has let the money supply run at about 13% for years and borrowed year on year, so fuelling the market. Oh,yes a certain prudent Gordon Brown was the man.
But he was the man who has stopped boom and bust, you say. Well he has used up his boom now we will have to deal with his bust.
- Nigel, Wimbledon
Oh yes, it's all to do with the mortgage lenders, it'll have nothing to do with the Government, who for the last 10 years have been almost entirely reliant on public borrowing and spending to cover the huge hole in the budget.
- Neil, Notting Hill
Too late, Darling. Gordon should have delivered this message 10 years ago, instead of crowing on about what a stable and secure economy he was creating. Doesn't look so stable and secure right now, does it?
- Nobby Clark, London
Come and live in Brazil where you only buy if you have the cash.
- Peter Glazier, Sao Paulo, Brazil
The IMF used a one size fits all model across many countries. On this imperfect model it says UK houses are overpriced. However, after the headlines, in the small print, it admitted that applying its model to Britain was flawed as it did not take in key factors in Britain such as shortages of supply, boosts to prices from immigration and greater affordability due to the availability of mortgages. The result was it qualified its pronouncement on Britain by saying there were "considerable uncertainties," which is economist speak for saying "we have no idea what we're talking about."
Darling seems once again to have read the headlines and jumped to incorrect conclusions. The only thing that will cause a housing crash is if his half-baked tax changes lead to an exodus of non-doms and a slowdown of the City economy.
- G, London
Take house valuations away from estate agents who have a vested interest in keeping them high. (But then so does the government with council tax banding).
- Philip, London, England
We've been here before of course, overinflated house prices tumbled in the late 1980s, and nobody appears to have learnt any lessons from that. The banks and gullible buyers must share equal blame. Watch out for rapidly rising levels of negative equity in 2008.
- David, London, England
Do I hear the barn door slamming? Where's the horse gone? And the cows? It looks rather empty!
- Phil Jones, London, UK
Tell us something we didn't know, irresponsible lending by the banks and building societies will bring the entire market down, but as long as they carry on fleecing the public it's okay as long as liebour get their cut in taxes.
- Trevor Roll, London
For years this government has been happy to benefit from a house price boom fuelled by excessive borrowing. They had plenty of opportunity to reign in lenders, but of course this would have meant less tax income for Gutless Gordon. So they did nothing. But now, when things start to look a bit dodgy, the finger pointing starts and it's suddenly all the banks' fault.
Brown's "prudence" was always spin, smoke and mirrors. It's just a shame we're all going to have to suffer for his failings.
- Ian, London
Nowhere does the IMF predict a devastating crash, just a slow down or correction.
- Teddy, Islington, UK
Yes - negitive equity comes again batton down the hatches before the storm.
House prices are too high, my house has trippled in 10 years what a joke.
Good for govenment, higher rates for me. The problem is every other house has appreciated as well so if I move I need that money and more for taxes.
We have all been sucked in by estate agents and governments.
- Baza, London
