'UK banks have little buffer for a downturn'

Britain's housing market faces a more serious slowdown than many expect if the buy-to-let market dries up and sub-prime repossessions mount, Credit Suisse analysts warned yesterday.

Buy-to-let investors and sub-prime buyers have lapped up about 20 per cent of new mortgage lending in recent years, but those markets are now under stress, the analysts said.

Credit Suisse said investment buyers would sit out the market as price rises tail off, and the drying up of wholesale funding that nearly wiped out Northern Rock could force Bradford & Bingley and Paragon, two of the biggest buy-to-let lenders, to rein in their lending. This scenario would take many buyers out of the market.

The sub-prime market could be a bigger problem as the credit crunch forces banks to pull products and ask for higher deposits. Repossessions would then rise as customers coming off cheap deals faced huge rises in borrowing costs.

"We think UK banks... have very little buffer for any downturn," Credit Suisse's Jona-than Pierce said in a note.

The analysts believe more than £300bn of mortgage balances have a loan-to-value of more than 70 per cent. They said lenders were exposed to losses on sales forced by repossessions, which would be at about a 30 per cent discount to market value.

Banks could need an extra £500m of bad-debt provisions based on current conditions; but, if house prices fell 10 per cent and arrears doubled, provisions would need to be £3bn. If things got as bad as in the early 1990s, provisions could rocket to more than £8bn, though the analysts said this was unlikely.