Mortgages Half Full or Half Empty?
There is a broad spectrum of opinion on what will happen to the housing market and mortgages as it comes out of the current credit crisis. At the optimistic end the chancellor says the market is fundamentally different to how it was in the early 90’s when prices crashed and mortgages were repossessed in record numbers. He also says that the UK is very different and will therefore not suffer in the way that America has. At the pessimistic end some experts are predicting American style meltdown with repossessions and falling prices everywhere.
Most housing market indicators have fallen recently and new mortgage numbers a have dropped sharply since mid 2007. The chancellor refers to this as “tight conditions” for lenders and he promises to act in helping the wholesale mortgage market in order to steady the housing market as a whole.
The Treasury is leaning toward the German private sector model with a well-supported wholesale mortgage provider sector. An alternative is the American Federal Housing Administration model where that agency lends money to banks in return for property-based assets.
It was the miss selling of cheap starter mortgages to risky debtors that pyramided into the so-called ‘sub-prime crisis’ and subsequent ‘credit crunch’. From having lots of money to splash out the finance sector is now very reluctant to lend to one another let alone the first time buyer of a house.
In the UK the Council of Mortgage Lenders is pushing for government cash injections along American lines because since it foresees £30bn shortfall in money for mortgages in 2008. It cannot see banks having enough money to meet demand for mortgages.
More cash is the cry from many quarters because of fears that the mortgage market might face a severe squeeze. If the demand for housing is cut back then house prices will fall further. In the background of course is the economic fundamental of UK housing supply being well below demand and this has kept the price rising steadily for decades. This will not change in the short or medium term.
The Treasury continues to sit on the fence. Not ruling out direct lending to banks, (It did it with Northern Rock) but the budget in March should give some signs as to which way they will jump. For sure it favours a private sector approach to build a more cash rich market for wholesale mortgages supported by legislation. It sees that German mortgage providers continue to have cash available for mortgages with bank IOUs linked to mortgage assets.
Whichever way it goes the Chancellor says he is optimistic for mortgages because unemployment is at a 30year low and interest rates are still very affordable.
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