US Credit mess spreading worldwide
Wreckage from the US mortgage crisis now appears to have reached British shores as well. UK politicians may be blaming the Yanks, for the fact that the Bank of England has had to step in and bail out Northern Rock.
However, the organisation has not been lending in the US. Before its current problems Northern Rock was growing rapidly, but dependent on wholesale markets for its money. Its own aggressive lending in the UK is at the root of its problems, combined with the global credit crunch.
Gabby says:
“No one can say that we don’t live in interesting times, and judging by both my own personal experience and the news stories day in, day out things are very interesting in the current world of personal finance.
I find the fallout from this subprime mess in the US a little worrying, and for a few good reasons:
- It’s spreading worldwide
- It looks set to take its toll on property and the availability of, and the cost of credit.
We can see this starting to happen already.
On the one hand I am thankful that I haven’t gone out and taken on a house and a big mortgage. At this stage in my life I don’t know if it’s wise, but more to the point the two groups being hit the most by the subprime fallout are banks (lenders) and new property buyers (borrowers). I’m thankful to not be in either of those groups right now…
Several of my friends have gone out and bought big, perhaps bigger than they should have, and not at low prices. The cost of housing has increased dramatically here in the past couple of years, and in many cases the increases seem almost ridiculous. But people pay them, and even more people are becoming willing to pay them - out of fear that if they don’t buy now they may be priced out of the market forever.
Personally, I don’t think that fear, rising prices and uncertainty about economic sustainability and interest rates are good reasons to rush out and buy a house - it’s just as easy to lose money with property as it is to make it, perhaps even easier. But I do worry about the overall affordability of housing, and the relationship between what’s going on in the land of property sales and how that relates to me as someone that rents.
Suppose rent is a very relevant issue to me, as I’ve recently been given notice to move. But I will talk about that more some other time…“
Linda says:
“ A change in attitude to credit risk and lending is sweeping the world. Aggressive lending for housing has not just happened in America; it has been a phenomenon in many countries.
While some have bought just to put a roof over their heads, many properties have been bought for pure speculation (and the rental return is too low to have justified the purchase).
I feel the gradual unwinding of this phenomenon is likely to affect many individuals and industries in different ways. The effects will extend beyond the obvious parties such as mortgage companies, real estate agents and the construction groups. The biggest risk to the overall economy is from a fall in general confidence, a perception of decreased wealth and a fall in the willingness to spend.
You can see that, in the UK at least, people are losing confidence in their banks - and in the case of Northern Rock customers this has meant getting their money out of there as soon as possible.
Many houses I see now are larger and more ostentatious (the McMansion) than they would have been otherwise, simply to maximise the effects of price appreciation. While having a beautiful home is in itself an enjoyable experience, being saddled with a huge mortgage and hefty repayments is not!
I believe the joys of home ownership will rapidly evaporate if property prices go into reverse, courtesy of the global credit crunch.“
