The credit crunch: One year on

It was around this time last year that the first rumblings began emerging from the international markets of serious problems with the US sub-prime mortgage market. Many of us have felt the resulting effects of tightened credit conditions, and it’s far from over – in fact, it appears that things are still getting worse.

The British Bankers Association recently reported that the number of new mortgage approvals in May fell by 20% in just one month.  That’s 56% lower than May last year. 

New mortgage approvals are the primary indicators of property sales in the coming months.  With approvals down, it is further bad news for homeowners, with economic experts expecting a fall in house prices of 10% by the end of the year.  This is expected to push 1.2 million people into negative equity.

Further fuelling the slowing housing market is the inability of many people to obtain mortgages, as lenders tighten their belts and turn their backs on borrowers.  In the last few days the cost of new two-year fixed-rate mortgages has risen above 7%.  Lenders are also seeking greater deposits from borrowers, with some demanding 20% of the property’s value in order to secure their most competitive mortgage products. 

This is leaving many homeowners with less than 20% equity stakes in their current property unable to remortgage for a better deal with a new lender.  Instead, they are left no alternative but to languish on their lender’s standard variable rate at the end of their introductory offer - a very expensive way to borrow money, especially as lenders continue to raise their SVRs in an effort to increase margins in a fragile market.

First time buyers are simply being left out in the cold.  Exiting the rental market is becoming particularly difficult for first time buyers again, with rents in some areas of the UK up by a third*.  The reasons for this are varied, but include an unhappy mixture of increased demand for rental properties driving rents up, along with landlords raising rents as their own mortgage costs rise.  Combine this with monthly household bills having risen on average 11.7 in the last 12 months*, and the £40,000 deposit required to obtain an affordable mortgage on a £200,000 property is becoming almost impossible.

These problems in the UK mortgage and housing markets are the inevitable results of the widespread cheap credit and irresponsible lending that characterised the last decade.  Howard Archer, chief UK and European economist at Global Insight, claims that we are currently experiencing an ‘extended, deep correction in the housing market’.**   

*timesonline.co.uk
** bbc.co.uk

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