Monday, 14 April 2008

Why Brown and Darling just don't get it.

Hearing that Darling wants lenders to introduce more 25 year fixed rates in order to protect against interest rate shocks, leads me to believe that the Government (I am using the term loosely as there does not seem to be much governing going on) is fighting the last battle all over again.

Let's be clear, in the last housing crash in 1989-1993 interest rates rose causing mortgage payments to become unaffordable. The resulting repossessions drove down the housing market over the 4 years. Interest rates fell, the housing market stabilised and confidence in the market returned.

That was the last battle.

This time around lenders relaxed their lending criteria over the last 6 years. This enabled borrowers to borrow historically unprecedented amounts from their lender, with minimal proof of income or means of repayment. This has lead to the greatest housing bubble in history.

Now the bubble is deflating, how can a house price crash be stopped.

The easiest way is to go back 6 years and for the government to lead and not follow. The debt burden has been talked about by economists and opposition MPs constantly over the last few years and nothing has been done.

OK so assuming no time machine exists, this is another Gordon Brown mess that needs sorting out.

The only way to stop this is for the lenders to continue to offer excessive mortgages to borrowers that should not be granted them. This is not going to happen.

Can the Bank of England pump enough liquidity into the system to allow lenders to be generous again? I doubt it.

Is Gordon Brown's £1500 bung to First time buyers going to save the market? Nope.

In my opinion nothing can now be done. The real question to ask is how low will the market go.

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