Saturday, 15 March 2008
Mortgage market starved of cash
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The housing crash is definitely here. UK house prices may not yet have adjusted but the financing has taken a dive. The money just isn't there any more. Mortgage approvals have tanked.
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The collapse of mortgage approvals is a quantity rather than price adjustment. Mortgage interest rate spreads over the Bank of England's rate have edged up slightly since August. However, the increase is a best marginal. Thus, it would appear that UK banks are pulling back from housing related lending activity.
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There are no prizes for guessing why mortgage approvals fell so dramatically? The credit crunch, and the collapse of interbank lending. Since August, interbank lending activity has all but collapsed. Banks are simply not willing to lend to each other.
Many UK banks, particularly the smaller ones, with limited branch networks, have tended to rely on the wholesale money market rather than deposits to finance their lending activities.
There is now a simply chain reaction taking place in the UK housing market; no wholesale money market means lower mortgage approvals. The collapse of mortgage availability means that there are no buyers in the market. Without the buyers, housing inventory increases. Once sellers see the market saturated with supply, prices will come down.
When prices collapse, speculators stop speculating and the market goes into meltdown.