Housing Market – Past Present & Future

It’s been well publicized lately that the housing market is on the brink of a crisis – in fact, the crisis has hit the US already. As mortgages become harder to come by and homeowners begin to struggle with rising interest rates and lower demand from buyers, the market is faced with a vicious circle in which prices keep falling, but there are not enough mortgages being offered to increase demand.

What happened? – a timeline

The problems can be traced back to the housing market in the US, in which people with poor credit history (known as ’sub-prime’ borrowers) were allowed to take out mortgages – many of whom subsequently could not keep up with payments.

Many of these mortgage debts had been ‘bought’ by UK banks, meaning they were now responsible for receiving the repayments. However, due to the amount of times these debts had been bought and resold, it was often difficult for banks to predict how much of the debts would be repaid.

When many of these sub-prime borrowers began to fall behind on repayments, it hit whoever ‘owned’ the mortgage debts – meaning both the US and the UK were affected. This is what became known as the ’sub-prime mortgage crisis’.

What is happening now?

UK banks’ losses have in fact been small so far – but there is a risk that they could get a lot bigger. For this reason, they are very cautious about new lending, and so they are tightening the criteria needed to qualify for mortgages.

The knock-on effect of this is that houses are harder to sell, meaning prices are getting lower. However, lower mortgage availability means that demand isn’t getting any higher – so house prices are likely to fall further – and so the cycle continues.

The Bank of England has acted on two fronts. Most significantly, they have swapped