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Global Housing Market Crisis

It seems the US sub-prime crisis has finally spread around the world – with a vengeance. Global stock markets took a hammering last week as a knock-on effect from the problems that started in the United States. In the UK the FTSE 100 fell from 6,700 to 6,038, losing all the gains it had made since the beginning of the year.

The problem has its roots back in 2003 when interest rates in the US were only 1% and Banks lent money to virtually anyone who asked or it. Mortgages were snapped up people living in Florida trailer parks or any other poor area in the States. Rates have crept back up and now they are at 5.25% in the US. Many of the people who took out those low rate mortgages cannot now afford them, leading to a huge number of repossessions in the States and a crash in the housing market. In some areas you can buy a property for less than you can buy a car.

The knock-on effect to the rest of the world has been caused by the fact that the American banks packaged their mortgages as saleable parcels and sold on them on to the global markets, where British and European fund managers and banks bought them. Now the funds have fallen in value and are full of virtually worthless property in the poorest areas of the US. On Thursday that the largest bank in France, BNP Paribas, had to suspend three funds which had large US debt exposure. The European Central Bank hoped that the injection of €95bn would prevent the US sub-prime mortgage problems from spreading into European banking systems, but it failed.

Banks have become concerned about their lending habits as they may have gone too far with loans in the past. As they got nervous, so they put the brakes on loans to big business, thus halting many mergers, takeovers and new projects. The worry now is that with businesses, unable to develop in the way they have wanted, will look inward again, trying to cut expenses and will cut back on their workforce. The consequence of that may be an economic downturn as people have less spending money, especially as their housing expenses have soared recently on the back of rising base and mortgage rates. These worries have quickly been realised on the stock market and led to the downturn.

The nightmare scenario is that markets will continue their slide and call in debts, leading to businesses going bust; consumer confidence will dwindle. The result is almost certain to lead to a housing price correction – maybe even a crash – in the UK. That will mean that the value of people’s houses will be on the way down, but the cost of their mortgage is still on the way up. Negative equity may be just around the corner, more arrears, repossessions … doom and gloom.

It is to be hoped that markets stabilise very quickly and this fall can be viewed as a healthy global correction, and that banks learn by their mistakes and learn more responsibly in the future. There may – juts may – be a silver lining. The Bank of England might view this crisis as more than they could possibly do to halt consumer spending and bring the housing market into line – as a result they may decide not to increase the base rate to 6%, and may even make to a cut to reinvigorate consumer confidence.

Tom Smith
15th August 2007

Recent Mortgage News:

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