UK housing market is heading for a fall, warns former US banking boss

Alan Greenspan, the former US Federal Reserve chairman who advises Gordon Brown, warned of 'difficulties' for home owners as rising interest rates bring house price growth to a halt.

He said the UK market was in greater danger from the world 'credit crunch' than the US because it has a higher level of adjustable-rate mortgages linked to interest rates.

The bleak warning comes just days after the Bank of England bailed out mortgage lender Northern Rock when it was unable to borrow elsewhere.

News of the emergency loan sparked panic among customers who withdrew an estimated £2billion in two days, contributing to market worries.

Mr Greenspan, 81, who has also advised President George Bush, said in a newspaper interview: "There are going to be some difficulties. 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. It's going to turn, it's got to turn."

He also warned that inflation soon could pick up dramatically and the Bank of England, which has raised interest rates five times in the past year to their current 5.75 per cent, may have to take them into double figures to keep prices down.

Mr Greenspan's comments follow recent signs that the housing market is slowing after a decade of uninterrupted growth.

But despite his gloomy prediction, he believes the UK economy is in a position to deal with any problems.

He told the Daily Telegraph: "You haven't had a taint of a recession for an extremely long period of time, and a good part of that is the flexibility that came out of the crush between Scargill and Thatcher.

"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."

Mr Greenspan has also praised Gordon Brown for turning Britain into 'the most open economy in the world'.

He used his memoirs to spell out his admiration for the Prime Minister while savaging President Bush for being profligate with public money.

The economic guru says that when he first met Mr Brown he was impressed by his commitment to 'globalisation and free markets' and the fact that he 'did not seem interested in reversing much of what Margaret Thatcher had changed'.

Mr Greenspan, who stepped down from the Federal Reserve last year, writes: "Britain's evolution from one of the most ossified economies in the years following World War II to one of the most open economies in the world is reflected in the intellectual journey of Gordon Brown."

In his book Age of Turbulence, Adventures in a New World, he says Mr Brown was a strong ally when it came to sitting down with other finance ministers and bankers at the Group of Seven meetings of rich industrial countries.

"He was a great support in 'proselytising about flexibility'."

Mr Greenspan also contrasts the strong performance of Britain under Labour with that of other European countries.

He says: "In terms of total output (gross domestic product) Britain has swept past Italy and France and on some measures challenges Germany in the levels of prosperity."

Mr Greenspan openly confronts President Bush with the assertion that the Iraq War was all about oil, an becomes the highest ranking official in American government at that time to do so.

"I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil," he writes.

And he defends his policy of keeping interest rates low after 9/11 as the US sought to maintain economic stability, a stance criticised by some policymakers for stoking the credit and housing boom which eventually led to the current crisis.