For the last 3 months banks and surveyors have reported falls in house prices. As a result the High Street is seeing lower spending and many retailers are having sales before Christmas. The Housing market in the UK has for the last five years supported increased spending and a feeling of wealth for homeowners. It looks like now that is over.
Halifax the biggest mortgage lender in the UK has reported that house prices fell by 1.1% in November. Annualised this would mean a fall of over 13% in any one year. They reported that it wasn't since 1995 that house prices have been through such a rough patch. Many commentators fear that the UK could be heading the same way as our American cousins. The fall in values in the US's housing market has led to real dangers of an economic slow down. So what's happened?
Much of the blame has been put upon the sub-prime crisis which has come out of the US. Mortgage lenders there got to lax with their lending policy and gave mortgages and loans to people who simply where never in a position to pay. This however was compounded by the fact that many people where able to continue to refinance to pay their mortgages due to rising property prices. In effect they were taking out debt to pay debt. As you can see this was disaster waiting to happen but the mortgage companies where looking for more profit which they would make by giving more loans. Only when these borrowers were then unable to refinance again did the problems start to appear. At this stage many of these loans were sold on across the world as investments for banks and pension funds. As the levels of defaults went up the banks then held their hands up to say they had a problem. The banks now face massive losses and one of the ways that they are recouping these losses in the US is to make many of their staff redundant. This in turn is exaggerating the problem as they then will struggle to meet their financial commitments and they will also have less money to spend on other things which could then lead to job cuts in other industries. If massive job cuts from financial institutions were made in the UK the problem could be even worse. Finance and Banking are massively important to the UK for the money it generates, if this was to reduce it would cause problems throughout the UK's economy.
House prices are also threatened as borrowing has become harder to obtain. The high loan to values and more risky financial products have been heavily curtailed and for many lenders they are facing issues about where they might raise money to continue their business's. Northern Rock is a high profile casualty in this but its not alone. The specialist lender Paragon is facing massive problems as it has to pay back over 200 million to its bank in February. It has asked other banks for help but rumour has it they are talking about charging it 5% above LIBOR, which in today's rates is about an interest rate of 11.5%. If they can not renegotiate better terms then they will have to wind the business down which involves job losses primarily in the Birmingham area where it has its offices. Banks who do have large cash reserves are unwilling to part with them as they want to make sure they can bear any losses they might incur during this turbulent time or they are unwilling to give it to another lender who could well not be able to pay it back. Just today the central banks have announced an injection of £50 million pounds worth of lending at completive rates to get the money markets going again. This has resulted in the rates today coming down but they are still high compared with 6 months ago. Also the £50 million can be seen as a drop in the ocean as the Northern Rock alone needed £23 billion to stay afloat.
It is really no wonder considering what's happening that the housing market has shuddered to a halt. If the crisis we have at the moment blows over quickly then it could well recover in 2008. However if we are now seeing an age of more restrictive lending then this housing crisis could well stay with us for a long time to come.
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