The Banks

Many moons ago the banks and building societies who lent money for credit towards mortgages tended to use
a simple formula to restrict the amount to be lent. Usually for a single person mortgage this was 3.5 x your annual
salary. For joint mortgages it was 3 x +1 salaries for both parties.

With decreasing interest rates, world financial stability and growth, widespread employment and a lack of housing supply in the UK, it was an ideal oppurtunity for the lending institutions to maximise profits by taking further risks on the amount they lent. 100% mortgages were not uncommon in view that the income to debt ratio was low due to historicallylow interest rates.

Now, this was going mighty well for the greedy lending institutions until somebody threw a spanner in the works - namely the sub prime mortgage market within the USA.
In the US, mortgages were given out undiscriminately to people who would never usually get credit. People on Social Security, Disabled on Disability Income, Bad Debtors and people who just couldnt repay such amounts. A huge fraud because the companies who rate the risk of debtors, then advise the banks, never checked the applicants. The banks were happy, they thought they bought into good credit until it was discovered that the bad debts in the US were carved up and repackaged with good debts, so that nobody knew exactly how much they stood to loose on the bad credit. When the US economic bubble burst, these type of debts were the first to foreclose. People owed more than the properties they had lent money on and in no way could they pay it back.

This brought on the credit crunch where nobody was willing to lend the amounts needed to continue financing credit arrangements. Banks and building societies couldnt lend the money to service new clients with or in the case of the Northern Rock, even carry on trading as a profitable business as they needed the cashflow for existing and new loans.

Another knock on effect is that companies are finding it difficult to finance expansion of their business. Many businesses use Debt Factoring or Credit Insurance to help cashflow or recover bad debtors and many of these products are being withdrawn. Even from companies who have very good trading history.

So we turn to the housing market where the amount of mortgages available have shrunk significantly. No longer are 100% mortgages available so some buyers now will have to take the time to save and this restricts the number of first time buyers.
Houses are taking longer to sell and in order to stimulate the housing market, prices are having to be reduced. Hence a reversal of the boom seen in the last 10 years. Im sure a lot of people still have some decent equity within their property as prices have only dropped around 12% in the last year. However, there are a number that are seeing negative equity because they bought in at the top of the market.

The economy and thus housing market are cyclic by nature and quite frankly, you would be an idiot to think that your property prices would continue to rise whilst inflation and interest rates would remain low forever. You have to realise that in order to have growth at some point you will need recession. Continual growth over long periods in the world economy isnt possible. Unfortunately, not even the financial markets are able to predict this with any accuracy. Of course, anybody can claim house prices will crash or recession and at some point in the future they would be correct - but thay cant say when!

The bad thing about this is that the finance instituations are so ingrained within the world economy, they knowingly can take such risks in the faith that the governments will come to the rescue with billions of pounds in order to avoid financial meltdown within the stock markets. Those people are still flying around in their helicopters and driving Ferraris whilst many who live on the edge through necessity, not choice, are suffering.

The Government

The UK Labour Government can in any way be innocent bystanders in this mess.

They failed to implement any guidance or legislation restricting the amount of lending to avoid bad debts. They let the finance institutions act exactly hopw they wanted without any intevention.

The former Chancellor, Gordon Brown is quite dim, obviously because he is a politician. He didnt really understand the new financial products, the sub prime mortgage debts being resold as good business.
He also lead the UK to belive that he was the genius behind the UK economic good fortunes, while everybody with any concept of the whole process could see that we were in a world economic boom. He mistakenly assumed we were in some form of economic bubble unaffected by world events. Dream on Brown. He was living in fantasy land, feeding the public with what they wanted to hear - all due to his genuis understanding of the economy. Who`s looking stupid now Gordon?

The government left social housing projects within the private sector which would never fill the demand of such housing. The lack of supply fuelled house price inflation to rediculous levels.

Unrestricted and chaotic mass immigration to the UK put tremendous pressure on the UK housing market and infrastructure, increasing house price inflation due to lack of supply.

Governments are incompetent by nature.

You?

My last point is about the good old British public. Obsessed with house ownership, home improvement and debt. Im quite sure that quite a few people gauge their success by the amount of outstanding mortgage they have. The bigger the mortgage, the more successful they think they are.

Also the feel good factor made a lot of people completely forget the self restraint of managing their debts sensibly. Must have, will have it yesterday society, not even embarrassed by taking on extra debt they cannot afford. Now those are paying the price. Although I do have reservations that some people with a young family and commitments really have no choice in the matter if they have to provide a home fit for the purpose. Large debt is often be a necessity.

However, for many, it is a case of greed. Unfortunately, this is just the type of society the banks and government want. Hungry for everything new, shiny and costing a fortune - all financed with credit. When the economy goes awry they own you. And they do own you.

Advice for the future - manage your debts sensibly and you`ll survive any recession until its over.