READ ALL ABOUT IT

Decrease in Housing Prices

It seems that the housing crash everyone is looking for is considered good news. Many of the analysts are agreeing that the falling housing prices is going to narrow the gap on the property ladder again, which means the time to invest is now. Britain’s housing market is on the edge of crashing. Northern Rock’s problems have extended throughout the UK to other banks and there was a credit crunch in 2007. These problems are going to offer a revision in the mortgage market, and indeed it has already begun. Northern Rock’s problems have caused a liquidity to occur of the money markets, and it has also created a need for the subprime market to change.

It seems that over the last decade the banks and building societies have not had the most traditional restrictions on loan to income rations. It seems in fact that they have been a little lax in this area, allowing for buyers to borrow rations of five, six or even seven times their income. Northern Rock even had mortgage products they offered to consumers for 125% of the loan to value on a home. This practice has now been labelled, “Crazy” despite the justifications of the banks saying it was based on affordability.

There was also an increase on self certification mortgages or in some terms “lie to buy” mortgage. Borrowers in traditional circles have to show proof of income, but with the self certification mortgages the providers didn’t ask for the borrowers statements of earnings. Instead they just gave out the loan. Many of these were seen as internet deals, where the advertising stated that anyone could get a loan. Then there were the buy to let mortgages that are supposed to be based on the expected rental income instead of the applicant’s actual income. It means that an oversupply of two bedroom flats would decrease the amount of rental income. This then means that the mortgages are too high for the rental income and the applicant’s income leading to a disaster.

There is also a thought that the increase in housing prices is good for the economy. This seems to be a fallacy that is purported by those making the money. The housing prices that are rising are not good for the economy or the benefit of the homeowners because there is more to gain from the falling property prices. First time home buyers can finally begin to purchase houses when the housing prices fall. More individuals can actually afford to purchase housing as well. When the prices increase the borrowers have to make their budget stretch to fit the new prices. If the economy or I should say the income doesn’t increase in the overall economy then the housing prices are actually hurting the economy. Part of the issue is that when a person tries to buy a home and they are trying to get their income to stretch the other aspects of the economy suffer. The spending that is called discretionary spending in retail stores and other areas is now lacking in funds. This means they are suffering. The increase in debt with credit cards is also keeping the money in the economy from just going to the same place, when individuals try to pay off their cards. In other words the rising housing prices will affect the economy, which also means there are housing crashes.

< Back to index