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Darling has over-egged the pudding

Chancellor Alistair Darling’s recent media outburst in which he stated that the UK faces the worst economic outlook in 60 years was nonsense. In the 1940s Britons faced petrol, clothing and food rationing and in the 1970s we suffered the three-day week and inflation hit more than 25%.

I know things look bad now but it seems that Darling has over-egged the pudding. In fact, those of you that have been in the mortgage industry for as many years as I have will probably be experiencing a sense of deja vu.

Cast your minds back 20 years and the similarities with today’s situation are striking. In 1988 the government started to put restrictions on Mortgage Interest Relief At Source, a tax break for home owners. These restrictions led to the eventual withdrawal of MIRAS, feeding a significant and sustained increase in house prices that lasted until 1992.

That year the UK crashed out of the European exchange rate mechanism and interest rates rose from 10% to 15% in a single day before eventually settling at 12%. This led to a chain of events that caused house prices to fall and arrears and repossessions to rise.

Banks and building societies experienced extremely challenging trading conditions. Many lenders were forced to stop lending and a number of US companies withdrew from the UK market. By 1993 25 societies had been swallowed up by larger rivals. The victims included Town and Country, Leamington Spa and Heart of England.

Compare that situation with today. Although the catalysts are different the consequences appear to be similar – lenders not lending, societies consolidating and house prices falling.

On a more positive note, today’s inflation and interest rates are lower and employment levels are higher than they were in the early 1990s.

This all goes to prove my point that Darling’s comments were exaggerated. Yes, things are bad now and likely to get worse but I believe we are in the middle of a natural economic cycle that has occurred regularly in the past 100 years. Today’s correction is likely to overshoot on the way down but at some point the market will improve.

I agree with HBOS chief executive Andy Hornby’s recent comments that until the US market finds its way through the storm the UK is unlikely to recover. The US has dealt aggressively with its problems and the move to stabilise Fannie Mae and Freddie Mac will hopefully have a positive long-term effect on the market.

If history is anything to go by it will take two or three years for the market to get back to normality. It’s been a year since the credit crunch began so it is likely we are in for another 12 months of challenging conditions.


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