HBOS chief says credit crunch likely to last another 18 months

THE credit crunch could last another 18 months, the head of Britain's largest mortgage provider warned yesterday.

Andy Hornby, chief executive of HBOS, said house prices were not likely to rise again until 2010 while lenders waited "to give the confidence back into the system for banks to start lending again". Hornby said British banks would continue to suffer major problems in offering loans until they could once again raise significant sums on wholesale financial markets.

The HBOS chief said that US money-market investors would not resume channelling of money to UK banks for mortgage-lending until US house prices started to recover – a process he said was set to last well into 2010. Hornby said: "My personal view, for what it's worth, is that it will take 18 months to play through the system.

"It's going to take 18 months before US house prices have started to rise again – which is what's required for banks to have the confidence to start lending again. It will take a long time to play out."

Hornby added: "There is no doubt that the next 18 months are going to see a considerable slowdown in GDP and we are looking at a period when we are seeing house price deflation which is stronger than the early 1990s.

"To balance that, I don't believe unemployment levels are going to get as high as they peaked in the early 1990s. That's going to be the very important underpin in terms of people being able to keep paying mortgages, etc. There's no doubt that we are looking at 18 months from now before we can expect to see significant improvement in the market."

However, Hornby said he was confident that the market would recover in the longer term once US house prices started rising again.

"I believe it will be growing again, if you are talking about a three to five-year period," he said. "I do believe markets correct over time and I believe asset-backed securities will have come back into some kind of normal trading environment and therefore wholesale markets will have unblocked.

"However, I don't think the growth in credit will be as strong as we saw in the previous cycle. I think banks' models will be altered for the long term."