Why is the Housing Market So Overcooked and Does This Relate to the Credit Crunch?
What we need to know is, are these two occurrences connected, and if so, how?
We’ll take a look at the over inflated housing market first. Houses are a commodity just like anything else, and are consequently governed by the rules of supply and need. If the quantity of houses obtainable is less than the number of purchasers wanting to buy, the price is inevitably going to rise. Likewise if supply exceeds that required, the price of character will fall. Therein lies the basis of the capitalist economy in which we live.
So how can we translate this to the housing market? It is, in a nutshell, to do with the way mortgages have been arranged for the last ten years, in particular the wide use of self certification. This effectively allows you to declare how much you earn without verification. You can see how it could be easy to stretch the truth slightly.
In the past, house prices were set by the amount of money borrowers were permitted to borrow based on their earnings. As an example, if prospective borrowers were only allowed to borrow 100,000 in a specific area, logic would dictate that house prices there would stay in and around that price. Otherwise, it would be impossible for the houses to be sold as people there could not provide them, unless they saved up a larger place to sustain the loan.
Self certification has changed that. People have been able to borrow more than they should based on overly generous income declarations, so this has in turn pushed the prices up. Prospective buyers in competition with each other have then become more aggressive in their self declaration and have forced up the amount they bid on the house.
And so on to the credit crunch. Well basically, this aggressive buying behavior has made it difficult for lenders to lend high loan values and has also meant that proof of income is compulsory.
However, because of the sharp increase in prices, the average house price has been set very high with purchasers having no way to find the money to pay them.
As a consequence, the housing market is at a standstill as there is simply not enough money around to buy.
To add insult to injury, we have at heart become a nation of borrowers and not savers. Our only financial salvation may lie in reversing that trend by going back to saving up meaningful caches of money and complementing that with more achievable mortgage requests. We must learn to live within our method again.
You may think that this advise would be self destructive my business as a financial and mortgage advisor, as it takes time to save again and I am doing myself out of business, but the truth is I would assistance more from a more stable and buoyant housing market, and this advise may be the only way forward for us all.