Consumers in the UK may be struggling to get credit, but the situation is much worse in the US, where two million properties could be repossessed as a result of the sub prime crisis.
A second rate cut in America is expected this week, which is predicted to be a quarter point reduction. But some are suggesting that it could even be a half point cut in order to pre-empt the oncoming wave of foreclosures when borrowers come off fixed rate deals and suddenly find themselves paying up to $500 a month more in mortgage repayments.
It is thought that the loss to the US economy could be as high as $2 trillion, and millions of Americans could be made homeless.
It is feared that a similar predicament could soon befall the UK housing market, as the US property price downturn – which has caused the sub prime crisis – has taken on a life of its own and is now threatening the UK’s dangerously indebted households and large financial services sector. The Bank of England confirmed in its Financial Stability Report last week that certain aspects of the UK economy were very likely in jeopardy.
Indeed, some experts have pointed to the various factors which render the UK vulnerable to a crisis of American proportions – the UK property market has far surpassed that of the US in terms of house prices during the last 10 years, but these are now starting to level off and are showing signs of a decline. Also, the percentage of Britons’ income that is used to pay off debts is approaching levels unseen since the crash of the late 1980s.
Graham Turner from GFC Economics believes that the UK is “about 18 months behind the US: their housing market started turning down in 2005”, he told The Observer.
Even when the crisis has been and gone lenders are still expected to enforce tighten their loan criteria which will hit first time buyers and those with poor credi especially hard. Banks and building societies have already adjusted their lending practices, making it increasingly difficult for borrowers to gain approval for credit cards, mortgages and other loans.
Julia Harris, mortgage expert at Moneyfacts.co.uk comments: “Overall, taking account of both prime and sub prime deals, the total number of buy-to-let and residential mortgage products available has fallen a staggering 40 per cent in just the last three months.
“While most of this change can be attributed to the sub prime market, seeing a 72 per cent reduction in the buy-to-let market and a 54 per cent cut in residential deals, the 16 per cent fall in prime residential products is worth noting.”
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