Saturday, 15 March 2008

Mortgage market starved of cash

(click on the image for a sharper version

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.

(Click on the image for a larger version)

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.

(click on the image for a sharper version)

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.


Anonymous said...

Nice charts.

Anonymous said...

Its a fascinating/devestating scenario. Everyone needs access to housing yet as I've found out recently negotiating prices down (for rentals anyway) can be very tough no matter how many 'global economic meltdown' reports I read. On the one side we have the speculators with the housing demanding high prices with the power to refuse and on the other we have people that need access to that housing with no way of paying for it. Its a Mexican stand off


Anonymous said...

A few months of an empty rental house and a massive monthly mortgage payment should make most BTL investors see the sense in cutting rents.

Anonymous said...

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openweb said...

When the house prices were booming it was a goldmine for property developers, even though first time buyers like myself were having trouble. Now it seems all the developers are worried they're going to lose money in the long run. I may be biased but I think its more important to make sure people can afford to get on the bottom rung or else future buyers are going to run out.

Michelle said...

In the past years, the private sector has dramatically expanded its role in the mortgage bond market, which had previously been dominated by government-sponsored agencies. Mortgages are boosting the housing sector, where predatory mortgage companies target consumers with bad credit ratings and low incomes. These consumers are often ineligible for the much lower prime market rates. The lenders prey upon the dream of homeownership among the working poor, offering to accept “high risk” borrowers. In turn, interest rates are inflated very high, so exorbitant that many borrowers cannot keep up with payments, penalties and other fine-print fees, particularly in the event of job loss, injury or illness in the family. A very high percentage of sub-prime mortgage and bad credit mortgages agreements end in desperate refinancing attempts, foreclosures and personal bankruptcy filings.