Bank runs affecting the housing market?

Last Modified: 17 Sep 2007
By: Benjamin Cohen

Caught between Northern Rock and a hard place. Is Britain's housing market really heading for a slump?

A financial crisis that defuses like a hurricane which hits land and all of a sudden runs into the mountains - that's the warning from Alan Greenspan, the world's most famous banker. He forecasts rising inflation and higher interest rates- hitting mortgage holders hard.

For years the British economy has been underpinned by growth in the housing market. Low interest rates and huge bonuses in the city have fuelled a massive buy-to-let boom pushing prices up across the country. The question now is whether this boom will turn to bust.

"The problem is that crisis can be self-fulfilling if enough people panic and keep their money under a mattress then it can be quite difficult for a central bank to handle"
- Professor Charles Goodhart

And there's at least some evidence that it's already happening, figures released today indicate there's been a fall of 2.6 per cent in the average asking price for a house, compared to last month.

The rate at which house prices are increasing has fallen back by 3.2 per cent and the number of homes coming onto the market has nearly halved compared to the same time last year.

Alan Greenspan's concerns over the British housing market, mirror a far bigger crisis in the United States. Millions of Americans are struggling to pay their mortgages. Repossessions are at an all time high and the number of new homes being built has slumped to its lowest level in a decade.

But estate agents say Greenspan doesn't appreciate the real differences between the U.S. and Britain.

Here there is a housing shortage, a quarter of a million new homes are needed in the UK, but thanks to laborious planning regulations only half that number are actually being built.

Things could still go badly wrong if the crisis of confidence spreads.

"The problem is that crisis can be self-fulfilling if enough people panic and keep their money under a mattress then it can be quite difficult for a central bank to handle.

"A central bank under those circumstances has to take some aggressive action by pumping loads of liquidity into the economy and if necessary doing it at much lower interest rates." - Professor Charles Goodhart

So, even if Greenspan is wrong to predict rising interest rates. Banks are likely to be much more careful who they lend money to.

What ever happens to prices, under Gordon Brown it looks like it could be harder to get onto the housing ladder than at any time in recent history.