The Credit Crunch

As my regular reader may remember, when I had to move home several months ago, I railed about the obscenely inflated prices that people were asking for as rent. Back then long before the “Credit Crunch” occurred, I was forewarning of that impending situation.

Here in the UK our whole economy has been driven by a perceived, paper, rise in the value of property. When in fact house and property prices were at their peek more than five years ago. This has meant that in the UK millions of people have borrowed money against the perceived value of their home to live the high life. Now the proverbial chickens are coming home to roost.

Now I don't blame the individuals for this, the fault lays with the banks who have been fuelling the perceived rise in house prices by giving 125% mortgages. The estate agents who earn more money by keeping the markets artificially high. But the biggest villain here is the government who has fuelled the housing market by constantly saying that there is a shortage of houses.

As all this talk of a shortage boosted house prices, and created the illusion that here in the UK we had more money in the British economy, this enabled the government and politicians to create the illusion of an ever expanding economy.

Firstly we need to nail the myth that there is a shortage of housing, there is NOT! Even in London and the South East where the pressures are greatest, twenty five percent of the homes are unoccupied. In other parts of the country its as much as forty percent. The difficulty is one of price, one of value. With the perception of property values rising, as well as a perceived shortage, landlords and letting agents would hold out for much higher rents. Sometimes they got them, but more often than not the landlords who jumped into the Buy to Let market only made any money when they sold the property. However the important aspect here is that because of the difficulty of finding affordable accommodation it energised the myth of a shortage of homes.

Even some banks could see the reality of the situation and nearly three years ago the Santana Group who owns Abbey National stopped lending on some types of property citing market manipulation. Meaning that properties were be sold at inflated prices.

Therefore this whole situation was foreseeable and predictable. Further the majority of the banks were involved in this nonsensical lending. If any bank or financial institution lends at more than one hundred percent of the value of an asset, it risks getting burnt. And while much of this has been blamed on the American Sub Prime market, here in the UK we need to take our share of the blame for what we have done.

In the UK personal debt stands at over one trillion pounds. That is one trillion pounds of future earnings or income that has been spent on a consumer driven spending spree. While some people will have borrowed money to invest on assets, the majority has been been wasted on; Clothes, Holidays, Electronic gadgets, Drinking, the list could go on. While this consumer binge may have kept the money circulating in the economy, like any over indulgence, the price now needs to be paid.

The majority of house prices will halve, and the sooner this happens the better as then we can start to house all the people who need accommodation and we can start to get the economy rebuilt.

While it will be difficult for many people, this situation could enable so many people to learn to be less wasteful and to value what they have, not to keep on dreaming of the latest fashionable must have.