Monday, 21 July 2008

Why rate cuts won't save the housing market.

With swap rates declining and lenders reducing interest rates, I have noticed a few market commentators discussing if this will 'save' the housing market.

I must add at this point that these commentators talk of the falling housing market being a bad event. This blatantly ignores the fact that millions of people have been priced out of the housing market for years. I would suggest that a falling housing market, although bad for some, was good for first time buyers waiting to buy and homeowners looking to move further up the housing ladder.

In fact 'saving the housing market' would have been questioning the lenders in 2001 about lending 6 times salary and not requiring proof of income.

Anyway back to interest rate cuts - as I have blogged before interest rates are the last housing market crash battle. Remember in 89-95 high interest rates made it unaffordable for homeowners to continue with their mortgage payments causing mass repossessions and a housing crash.

This housing bubble has been caused by massively loose lending criteria leading lenders to lend way more than they have lent historically. This pushed house prices up to record highs. The lenders have now pulled back this lending and are now mainly lending sensibly again.

Reducing interest rates will help home owners afford their mortgages and may help the UK avoid a major recession, but the housing market is still suspended way above the amount that lenders are willing to lend.

It is possible at the moment for a first time buyer to get an affordable mortgage with a 10% deposit on a repayment basis. The problem is that the mortgage allowed is around 30% lower than the property they want to buy.

As the housing market falls, it will meet the armies of first time buyers looking to buy and the market will kick back into life. These armies of first time buyers are sitting on the sidelines waiting for these overvalued properties to adjust to their allowable borrowing.

If you think interest rates being reduced is going to stop the housing market falls, think of it like being on the Titanic after it hits the iceberg and somebody saying - "It's OK I have found another 10 buckets - let's start bailing. If only we had another 10 buckets we could stop it sinking"

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