Freedom of the markets

The ‘credit crunch’ is now firmly established; not only in reality, but our minds – which is perhaps an even bigger factor when it comes to what you are prepared to buy, or spend your available cash on.
First Direct have suspended new mortgages and tighter loans and credit card offers are sure to follow – not just from First Direct, but all banks and financial product providers.

Just to remind ourselves what started all this:

  • Some banks (US mainly) decided to give home (and other) loans to folk who basically had not a hope in hell of ever being able to repay them – or even manage the monthly payments in some instances.
  • These loans looked good on the books when it came to the arrangers and bank managers being able to ask for huge bonuses.
  • The customers who took out these loans have been labeled ‘sub prime’, because banks etc do not like to call a spade a spade when they have plans for the next stage, which is:
  • The packaging up of these loans and selling them on to other banks – as a kind of investment unit. Bits of this are then sold onto you (yes you) in the form of bank interest, profit on your ISA, pension and other financial products that show a profit – or should.

You don’t really need to be a genius to see that this is a house of cards, and a house of cards built on sand, wet sand.
It was not a question of if; but when; and that ‘when’ is now…

The sub prime market has failed because an economic downturn started in the US and the ‘sub prime’ customers decided that they would rather eat than pay back the bank loans.

So… because all the banks are now scared to lend money to each other or anyone else (fearing another Northern Rock incident), they are pretty much only lending to people they are sure they will get it back from. Even then they will only lend in what we used to accept as sensible proportions; for example you may need to produce 20% towards the value of your first or next property.
This in turn will kill some of the speculative nature of the western European housing market and makes that £200,000 1 bedroom flat in a upcoming city centre seem not quite such good value – especially if you can’t sell it or rent it for the £1,000 a month needed to cover the costs.
Today it is said that the UK housing market is overvalued some 28%, but this is not a flat 28% across the board; rather it is heavily weighted to some of the recent developments in city centres – which are more like 50% overvalued.
Those that have been sold, were sold with dreams attached; dreams of a football players’ life style, sadly the dream is now exposed as myth and the residual value of the property is low.

Whilst this is painful for those directly affected, in the end it will restore some balance – it clearly could not have continued for much longer.

So the markets have worked; they have balanced themselves out and should be left to their own freedoms. The problem is that they have been selling ‘snake oil’, and that should have been stopped – or at least the perpetrators should not be leaving stage left with million pound payoffs.

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