Sub-prime market shows 'stress' - but London house prices surge

Fears that America's sub-prime mortgage crisis will cross the Atlantic were stoked yesterday by a stark warning of the dangers of a housing slowdown and rising interest rates.

The credit rating agency Standard & Poor's said "signs of stress" were emerging in the UK's £15bn sub-prime market, which specialises in lending to borrowers with patchy credit records who cannot get mortgages from mainstream lenders. It said arrears on these risky loans had risen from 17 to 23 per cent and repossession rates had trebled over the past two years as moreborrowers struggled to keep up with mortgage payments.

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S&P said the future of the UK non-conforming sector would depend on just how sharply house prices cooled and whether interest rates remained at the low levels of the past decade. But it warned conditions were likely to worsen. "Looking forward, we expect a continued slow deterioration in UK non-conforming arrears in the short term, as recent rate rises work their way through," it said.

The warning, which came on the eve of the Bank of England's latest decision on interest rates, follows a crisis in the US, where the sub-prime market has collapsed in the wake of falling house prices. New Century, America's second biggest player, filed for bankruptcy protection this week. The crisis has been blamed as one of the main factors behind the recent turmoil in financial markets.

In the UK, the industry was rocked last month by news that Kensington, which pioneered the market in the 1990s, had ousted its chief executive and issued a long-term profit warning. Most experts are confident the UK sub-prime market will escape the worst of America's troubles, pointing out important differences between the two: sub-prime is a much smaller proportion of the mortgage market in Britain; US borrowers have been caught out by a series of interest rate rises; US house prices are falling in contrast to the UK where they are rising; and lending criteria tend to be much looser in the US.

"We believe the recent problems in the US will not be replayed here," said Jim Cunningham, senior economist at the Council of Mortgage Lenders. "Rather, we should learn from them - and be reminded not to emulate every lending innovation from across the pond."

Others, however, cautioned against complacency. "The UK is unlikely to experience a carbon copy of the current US crisis. Nevertheless, the UK outlook is far from being risk-free," said Ed Stansfield, property economist at Capital Economics. The warning came as the building society Nationwide said the average house price in the UK was 9.5 per cent higher than this time last year at £175,554.

Although prices in the north of England and Wales are starting to slow, those in London and Northern Ireland continue to soar. In the Province, they are 57.6 per cent higher than a year ago, the fastest annual rate of increase anywhere in the UK since Nationwide's records began in 1973.

Economists are split over whether the Bank of England's Monetary Policy Committee will raise interest rates by a quarter-point to 5.5 per cent today, although most expect it to wait until next month.