Mortgage lenders are bracing themselves for a slump in property prices of up to 20 per cent, The Independent on Sunday can reveal. A housing market collapse, wiping an average of £40,000 off a home, is now being discussed by lenders.
The warning deepens the gloom for the Prime Minister, Gordon Brown, whose survival at the next general election hangs on the economy. He told leaders yesterday that the world faces "the first truly global financial crisis". Hosting the Progressive Governance conference of centre-left politicians, he called for an overhaul of the International Monetary Fund (IMF) to act as an "early warning system" for the global economy.
Up to a third of property deals are falling through as lenders reduce the availability of mortgages. The price comparison website Moneyfacts.co.uk said 22 per cent of deals available a week earlier had been withdrawn, while new research from the credit reference agency Experian shows Labour areas to have the highest proportion of households most at risk from a market crash. If this were to happen, dozens of MPs could lose their seats on polling day.
In a sign of the panic in Labour ranks, around 30 MPs have revolted over the scrapping of the 10p income tax rate, which comes into force today.
Lenders had until recently predicted a small fall in house prices of no more than 5 per cent, following claims by the Government that Britain was well placed to weather the global economic storm. But recent turmoil in the UK mortgage market has spooked banks into thinking that a general crash is now more likely. Fears deepened last week when the First Direct bank announced it would no longer offer mortgages to non-customers. The Bank of England said the number of new home loans taken out in February was down 39 per cent on the same month last year.
These events are prompting banks to examine whether they can afford the loans they have already made. "Whereas in the past we were modelling for a 5 or 10 per cent price fall, we are now testing against a 15 or 20 per cent fall," said Matthew Bullock, chief executive at the Norwich and Peterborough building society. A 20 per cent fall would reduce the average house price of £196,000 to little more than £156,000.
The IMF earlier warned that prices could drop by as much as 30 per cent.
Under the rules of the Financial Services Authority, the industry regulator, all lenders have to undergo "stress tests" to ensure they will be solvent if the economy worsens or house prices crash.
"We have three scenarios – a small fall, a mid-level fall and doomsday," said Andy Wiggans, director of mortgages at Bradford & Bingley. "Like other lenders, what we see as a mid-ranking fall has worsened a bit in reaction to housing market problems."