Central bank bears responsibility as UK housing crisis looms

Wednesday 24.09.2008 (23 months ago)
United Kingdom :: Property News

Industry experts at Capital Economics are predicting that the housing prices in the United Kingdom are likely to fall by a dramatic 20 percent over the next 18 months.

While Britain’s housing market is already gloomy, the situation is expected to get far worse, partly due to the fact that the proportion of first-time home buyers has decreased from 50 percent to 30 percent, as more stringent mortgage conditions and instability in the housing market turn Britons away in droves from purchasing real estate.

Key economists in the UK believe that the Bank of England has to bear a significant degree of responsibility for the dire situation following the collapse of the housing bubble.

Over the past decade, housing in the UK has become synonymous with skyrocketing prices. The problem, however, is that the Bank of England helped fuel this wild inflation in home values by keeping interest rates remarkably low.

As such, it became much easier for first-time buyers to enter the homeowner’s market and lending institutions often gave mortgages for 95 percent of a home’s accepted price.

As it becomes clear that many Britons who purchased homes in the last four to five years paid far more than the real market value of their property, owners stand to lose money and are forced to finance hefty mortgages as the economy dips into recession and as unemployment figures increase.

Most economists point out that higher interest rates would have slowed the unrealistic inflation of housing prices.

The simple fact that housing prices in the UK skyrocketed by an astronomical 138 percent since 1993 should have sounded the alarm bells for Britain’s financial leaders and it should have certainly made it clear that the housing boom’s eventual collapse would have devastating consequences for British homeowners.

© Prime Asset Investments Ltd.