HBOS chief warns credit crunch will last into 2010

Permalink: HBOS chief warns credit crunch will last into 2010
by Lin Freestone

In an interview broadcast by the BBC on 6 September, Andy Hornby, the chief executive of HBOS, warned that he considers it could take 18 months before US house prices start to rise again. HBOS owns the Halifax, which is the UK’s largest mortgage provider.

In his opinion, until the situation in the US improves, there will be little confidence for banks to start lending again. Approximately two-thirds of wholesale funding received by UK banks comes from overseas, with the United States being the primary lender.

Andy Hornby considers that British banks will continue to suffer major problems in offering loans until they can once again raise significant sums on wholesale financial markets. His comments suggest there is little that the UK Government could do to stimulate the markets.

He added that the UK will see house price deflation on a scale not seen since the early 1990s, but he thinks that unemployment, a factor which underpins people’s abilities to pay their mortgages, will not reach the highs of that era.

As a direct result of the accumulation of factors hitting consumers’ pockets, with rising costs of food, fuel and energy, people are reducing the amount of savings they can make. Prudent banks should be budgeting to lend only what they take in, and a fall in savings means fewer loans can be made.

Asked if the package of measures announced last week by Prime Minister Gordon Brown to assist those affected by the difficulties in the property market would have an impact, Hornby replied that small initiatives will help the market, but there is no magic bullet. Nothing is going to change the core correction mechanisms that always happen in markets as supply and demand balance over time.

He does not believe that individuals’ behaviour is going to be massively affected by the temporary suspension of stamp duty on properties valued at less than £175,000.

Andy Hornby believes that the UK housing market will recover and will return to become a strong, steady source of long-term growth, despite a short-term fall in house prices that could reach 20% in 2009.