Wednesday, 21 January 2009

How crunchy is your mortgage?

An interesting little snippet emerged from a BBC website report on the plummeting pound. It says "UK mortgage lending fell by 30% in 2008 to the lowest level since 2002". Such a statistic would mean nothing if it referred to numbers of transactions, so I infer it means the total value of mortgage loans made in 2008. I wonder whether I am right in finding this neither surprising nor particularly worrying.

The housing market started to turn south in 2007. Prices were being squeezed in the summer of that year and took a noticeable downturn from late summer. Three consequences seem inevitable once prices are being forced down. First, a number of potential sellers are not prepared to drop their price; secondly, a number of potential buyers decide to wait to see how much further prices fall and, thirdly, the total value of sales is likely to fall. The first two factors reduce the number of transactions below what it would otherwise have been and the third is a consequence of not only lower volume of sales but also lower prices on each transaction. When you then add-in further caution caused by the threat of an impending recession and the attached uncertainty about employment you have yet further downward pressure on both volume of sales and individual prices.

It is only once these factors have come into play that a shortage of credit has any effect. If, as we are constantly told, loans are very hard to come by the number of buyers able to finance a purchase will necessarily be reduced. And yet, despite all these downward pressures, the total value of mortgage loans given in 2008 dropped by only thirty percent compared to 2007. That does not suggest to me that mortgage loans are like hens' teeth. Perhaps what was being evidenced was far less a credit crunch than a decline caused primarily by the inevitable bursting of a price bubble.


Mark Wadsworth said...

TFB, that 'down 30%' figure is meaningless, as lending fell every month during the year.

Lending in November 2008 was down 90 PER CENT against November 2007. Allegedly.

Pogo said...

What's a mortgage? :-)