The credit crunch is likely to last well into 2010, the head of the UK’s largest mortgage provider has warned.

HBOS chief Andy Hornby told the BBC it would take 18 months before US house prices started to rise again.

That was needed “to give the confidence back into the system for banks to start lending again,” he said.

His comments suggested there was little that the UK Government could do to stimulate the markets, the BBC’s business editor Robert Peston said.

‘Confidence needed’

Mr Hornby – whose bank owns the Halifax and Bank of Scotland – said British banks would continue to suffer major problems in offering loans until they could once again raise significant sums on wholesale financial markets.

“It (the credit crunch) will take a long time to play out” Andy Hornby Chief executive, HBOS

About two-thirds of wholesale funding received by UK banks comes from overseas – primarily from the US.

And 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.

“My personal view, for what it’s worth, is that it will take 18 months to play through the system,” Mr Hornby told our business editor in the latest of his Leading Questions programmes.

“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.”

Adds to gloom

Mr Hornby added that there was “no doubt” that the UK was to see house price deflation on a scale not seen since the early 1990′s.

But he added that unemployment – a factor which underpins people’s abilities to pay their mortgages – would not reach the highs of that era.

His comments add to a gloomy week of economic news, following chancellor Alistair Darling saying that the economic times faced globally “were arguably the worst they’ve been in 60 years”.

Separately, the Organisation for Economic Cooperation and Development (OECD) has forecast that the UK economy will fall into recession this year – comments which sent sterling to its lowest level against the dollar since early 2006.

Meanwhile London’s index of leading blue-chip shares, the FTSE 100, lost 7% in value this week – its largest fall since July 2002.

Too dependent

“Mr Hornby also implies that there’s little the government can do to restore positive momentum to the economy” Robert Peston BBC Business Editor

Mr Hornby’s assessment implied that the government could do little to persuade UK banks to start providing more normal amounts of loans to homebuyers and businesses, our business editor said.

“Since it was the reduction in the availability of credit that precipitated the economic slowdown in the UK, Mr Hornby also implies that there’s little the Government can do to restore positive momentum to the economy.”

Many argue that the prime cause of the credit crunch in the UK was that banks had become too dependent on selling their mortgages to global investors in the form of mortgage-backed securities.

So the sudden unavailability of these deals deprived UK banks of much of the finance they needed – something which led to the eventual nationalisation of Northern Rock.

Many banks have taken efforts to shore up their balance sheets during the credit crisis.

HBOS raised £4bn in a rights issue, but largely from underwriters after the majority of shareholders snubbed the deal.

It also saw profits before tax fall 72% in the first six months of 2008 against the background of the crisis and a tougher economic climate.

News reported by The BBC

US house prices were down a record 15.4% in the April to June quarter compared with a year ago, according to a closely-watched report.

The decline was recorded by the latest S&P/Case-Shiller survey of US national home prices.

The report said the fact that the falls were nationwide was the latest sign the US housing downturn is continuing.

Separate government data said sales of new homes hit 515,000 in July, up from June, but still near a 16-year low.

Both sets of figures come a day after a study by the main US estate agency body, the National Association of Realtors, said the volume of home sales in July were down 13.2 on the year.

‘Mortal enemy’

Housing analyst Gary Shilling said a key problem for the housing market was the oversupply of unsold new homes built during the recent boom years, which he estimated still stood at 1.8 million properties.

“It is reasonably encouraging in that it suggests that some parts of the problem are more localised now” Economist David Sloan of 4Cast

“The key point is we are a long way from bottoming out,” he said.

“The bulls keep hoping otherwise, but the basic problem is excess inventories. They are the mortal enemy of prices.”

However, other analysts were less downbeat, pointing to the fact that the month-on-month rate of house price declines appeared to be slowing.

The fall in May was 0.85%, compared with 1.28% in April and 2.15% in March.

“Prices are still falling but at a progressively lesser pace, this is the slowest decline since last July,” said economist David Sloan of 4Cast.

“It seems that some areas are now finding a base. It is reasonably encouraging in that it suggests that some parts of the problem are more localised now.”

The S&P/Case-Shiller survey bases its findings on 20 of the largest US cities.

Those that saw the biggest drop in prices from the second quarter of 2007 to that of this year were the sunbelt cities of Las Vegas (-28.6%), Miami (-28.3%), and Phoenix (-27.9%). Falls were also particularly sharp in Southern California, which had previously seen a huge boom.

The least affected city was Charlotte, North Carolina, where prices fell only 1%.

The continuing falls in the housing market are likely to prove a further headache for the banking sector, which has suffered huge losses as the value of its bonds linked to house prices has fallen.

News reported by The BBC