Best Financial Markets Analysis Article The British Bankers Association mortgage lending statistics reveal a contraction in the total amount of outstanding mortgage debt amongst its UK member banks, of nearly £6 billion from the peak set in October 2007. Whilst the amount may seem small in terms of the size of total mortgage debt of some $1.2 trillions, it is however opposite to the atmosphere of rising mortgage debt that sustained the housing bull market.

The contraction in mortgage debt following the credit crunch clearly signifies a tightening in credit requirements for mortgages across the board, as the risks of increased bad debts also increases the probability of further bank failures following on from the Northern Rock Bank bust in September 07.

New Mortgages Supply Contraction

One of the major lynch pins of the UK's economic boom has been easy credit that lead to house price inflation which enabled home owners to make mortgage equity withdrawals for consumption. Since the credit crunch started to bite there has been a sharp drop in the number of new mortgages for home purchases and equity withdrawals which is contributing to the downward deflationary spiral of UK house prices, consumer spending and economic activity.

An estimated 1.4 million home owners on low fixed rate mortgages taken out during the height of the housing boom, well before the credit crunch started to bite, will increasingly find it difficult to obtain favorable mortgage deals as their fixed rate deals expire as there has been a contraction in the supply of current fixed rate mortgage products which now carry much tighter lending criteria and arrangement costs. Therefore many borrowers mortgages will reset to and remain at high standard variable rates which increases the risks of a surge in repossessions.

Therefore the mortgage debt statistics confirm the Market Oracle forecast as of August 2007 for a fall in average UK house prices of 15% over two years to August 2009. With house price data to date confirming the trend.

UK Interest rates are on track with the Market Oracle forecast as of August 07 and Sept 07 for UK interest rates to fall to 5% by September 2008, this was revised lower to 4.75% in January 2008 , following the US Panic rate cut 0.75% on 22nd Jan 08 to 3.5% which was later followed by a further 0.5% cut to 3%. However, UK Interest rate cuts won't be of much help to home owners due to the impact of the wealth effect going into reverse as house prices continue their month on month declines. For example on an average mortgage of £150k, a 0.25% cut in interest rates would result in a cut in monthly repayments of just £31. Whereas a decline in house prices of 0.5% per month results in a monthly loss of equity of £950 on an average £190,000 property. Therefore many market commentators and economists expecting a series of rate cuts to turn the UK housing market around may be surprised that the rate cuts will have very little impact on the deflating housing market.

By Nadeem Walayat

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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