While the recent financial crisis may be blowing over it may have left a bitter taste in the mouth of the housing market. Northern Rocks and other lenders share prices may have recovered but the housing market is displaying signs of a correction. As an avid reader of the property pages in my local area (Sheffield) it was interesting to see pages of house?s offered by agents with the heading ?price reduced for a quick sale?. For the last five years estate agents in my area have been bullish on prices squeezing as much out of each house sale as they can, no doubt to inflate their commissions and to win new instructions. It seems that they are now struggling. So why has the property boom come to a halt?
Well the easy answer has been the actions of the Bank of England. We have seen 7 rises in the bank base over the last eighteen months which was designed to slow the borrowing rate of the population to control inflation. Well the answer is its worked. However the recent crisis in the financial markets has seen rates climb again, not through a decision by the Bank of England, but through decisions made by individual banks wanting to keep their money and not lend to other, especially those deemed to be more risky. For somebody like Northern Rock who needs to borrow money to survive, or at least trade normally this has caused huge problems concluding with a run on the bank by its depositors. The bank of England has stepped in to prop this bank up but other banks are still not lending money as freely or as cheaply as they once were. This could have even wider implications as it could slow growth in the economy or even send it into recession. With data showing that inflation dropping quickly below the 2% target a reluctance by banks to lend will not be good news for the bank of England and they like their American counterparts may be forced to cut interest rates in the future. This may sound good for the property market but if the Bank was to do that and the banks started to lend more freely again then this may quickly bring inflation climbing back up again. This could force the bank into raising interest rates again causing the volatile market which will probably scare off many potential house buyers and sellers. Industry experts are bracing themselves for a price correction in the housing market but some areas are going to be hit harder than others. Rightmove the website reported that house prices were down 2.6% on last month with the housing market as a whole cooling since the start of the year. Some experts believe that London may see a reversal in its recent gains with falls of 10% in some areas. There are claims that many mortgage lenders are now rethinking their strategies for the future in light of what has happened in the USA with sub prime mortgages. Bradford and Bingley, HBOS and Alliance and Leicester may all look at reducing the number of loans they make in the future and will defiantly probably look at taking on loans with less risk meaning tougher multiples and maybe bigger deposits for new mortgage customers. Many experts however believe that it may only be a temporary slowdown much like we had a couple of years ago. The UK still has the fundamentals of a healthy property market. If unemployment goes up or the economy goes into recession then a house market crash would be one more likely, two more severe and three for a much longer period. This is however not he case and as long as the Bank of England and the Government can continue to deliver a strong Economy and Jobs we should see continued long term growth of house prices.
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