First time buyers are the lifeblood of the property market
Britain’s housing market is teetering on the brink of a very high cliff. Northern Rock’s ongoing problems are rooted, not just in the liquidity of the money markets, but also in the UK’s own version of the sub-prime market…
Over the last decade, banks and building societies relaxed traditional restrictions on loans-to-income ratios. Buyers can now borrow ratios of five, six or even seven times their income. Northern Rock had a mortgage product offering borrowers loans of up to 125%. This crazy lending has been justified by banks saying that the loans are based on “affordability”.
There has also been a rise in self-certificated mortgages, also known as the “lie to buy” mortgage. Borrowers do not need to provide proof of income, and mortgage providers don’t ask how much borrowers earn.
Add on buy-to-let mortgages, based on expected rental income rather than the applicant’s actual income, an oversupply of two bedroom flats (the staple diet of buy-to-letters) and you have the financial equivalent of a multiple pileup in the making.
And still, one of the great enduring myths of our time is the strange notion that house price rises are good for the economy and benefit homeowners. They do not. Most people in the UK have more to gain from falling property prices than they think.
First-time buyers, the lifeblood of the property market, will finally be able to get their foot on the ladder without taking out eye-watering mortgages, or resorting to increasingly desperate “buy with a friend/somebody you contacted on Facebook” methods.
As prices have rocketed over the last decade, existing borrowers have seen their budgets stretched. This, of course, is also bad for the wider economy as discretionary spending has to be reined in. Falling house prices will enable people to spend more of their earned income on the high street without going into further debt. Rising prices, and MEWing (Mortgage Equity Withdrawal) to pay for plasma televisions is not a sustainable alternative.
Long-term owners, people who regard a house as somewhere to live - not a leveraged investment opportunity - will benefit, too. If they bought more than five or so years ago, they will be sitting on gains that not even a huge house price crash can erode. Indeed, most of them won’t even be interested - they will continue to live in their homes, and have no need to move.
For homeowners planning to move, a falling housing market will be a help rather than hindrance. A crash will bring the rungs of the housing ladder closer together, meaning that it becomes easier to trade up…
Source: The Money Centre
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