House Black Market
Real Estate: Past, Present and Future
It has been well publicized lately that the housing market is on the verge of a crisis – indeed, crisis has hit the U.S. already. As mortgages become harder to get and homeowners begin to struggle with higher interest rates and lower demand buyers, the market faces a vicious cycle in which prices continue to fall, but not enough mortgages are offered to increase demand.
What happened? – A timeline
The problems date back to the housing market in the U.S., where people with bad credit (known as Subprime borrowers) were allowed to take mortgages – many of whom could not keep up with payments.
Many of these mortgage debts had been "bought" by banks in the United Kingdom, which means that now is responsible for receiving reimbursement. However, due to the number of times that such debts had been purchased and resold, it was often difficult for banks to determine the amount of the debt is paid.
When many of these borrowers high risk began to fall behind in payment, it was where "ownership" of mortgage debt – meaning both in the U.S. and the United Kingdom were affected. This is what is known as the "sub-prime mortgage crisis."
What is happening now?
losses by banks in the UK have been actually small so far – but there is a risk that they could get much bigger. For this reason, they are very cautious about new loans, which are tightening the criteria necessary to qualify for mortgages.
The multiplier effect of this is that the houses are harder to sell, prices are way ever lower. However, reduced availability of mortgages means that demand has not grown up – so house prices are likely to continue to decline – and so the cycle continues.
The Bank of England has acted on two fronts. The most significant is that they have exchanged £ 50 billion of government bonds in exchange for security banks' mortgage debt – actually a sign of confidence that losses from subprime mortgages will not be as large as banks feared. This movement is designed to calm the insecurity that is causing the more stringent lending policies and avoid particularly dangerous drops in housing prices.
They have also reduced the basic interest rate in order to convince banks to lower mortgage interest rates – but this is currently not working, and so problems remain.
What happens next?
There are conflicting opinions among experts:
RICS (Royal Institute of Chartered Surveyors)
• predict that housing prices in late 2008 are set at 5% since late 2007
• Sales will be reduced by 40%
CML (Council of Mortgage Lenders)
• House prices in late 2008 is set at 7% since late 2007
• Sales down 35% 770,000 sales
While the scope of the predictions vary, most experts agree that the housing market is increasingly in the recession. prices housing have fallen only slightly so far – but if the trend continues, the housing market will decline in value significantly in the coming months.
U.S. have already gone through what the UK is happening now – a tightening in lending criteria combined with fewer mortgages – and have seen some sharp falls in house prices. Many economists believe the UK will follow this pattern.
The banks have to continue borrowing and loans, although a little more carefully than before, if the market recovers. If they do not, housing prices keep falling, and could take years before begin to rise again.
About the Author
Graham Black is an experienced finance writer with over 15 years industry experience. Always seek professional help from the appropraite person (debt adviser, IVA advisor…) if you are unsure about your finances.
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