Alan Greenspan warns of UK house prices drop
By Edmund Conway Telegraph Economics Editor
Last Updated: 7:35am BST 17/09/2007
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.
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."