You have to have been living under a rock to be unaware of two very important pieces of news currently dominating the media. We are slap bang in the middle of a credit crunch and the cost of houses at the moment is unfathomably high.
What we need to know is, are these two occurrences linked, and if so, how?
Let us first give consideration to exorbitantly overpriced housing market. Just like any other commodity houses are governed by the economic principles of supply and demand. As a general rule, if demand for a product exceeds the amount of the product available then the value of that product will rise. Likewise, if the supply of the product exceeds the demand for that product then the price will fall. These are the fundamental principles behind the capitalist economy.
But how is this reflective of the housing market? Well, over the last decade mortgages have been more accessible to the public, one type of which is the self-certification mortgage. With this type of mortgage it is up to the individual to certify what they earn and this may be open to quite a broad span of interpretation on his part.
House prices have usually been based around the individuals? ability to borrow an amount of money, which in turn was reflective of the amount of their earnings. Now it is fair to say that if in a certain area the average mortgage that can be attained is 100,000 then the average house price will not exceed that, since the money for purchase would not be available unless there were savings available to add to the amount borrowed by the individual.
Self certification has changed that. People have been able to borrow more than they should based on overly generous income declarations, so this has in turn pushed the prices up. Prospective buyers in competition with each other have then become more aggressive in their self declaration and have forced up the amount they bid on the house.
Which leads us on to the credit crunch. Lenders are now placing more restrictions on mortgage purchase and verification of income is compulsory. Due to the previous competition for property and the subsequent inflated house prices people are finding themselves in the situation where they cannot afford the property on the market because their income is insufficient to obtain a mortgage to cover the purchase price.
As a result, the housing market is at a standstill as there is simply not enough money around to buy.
To add insult to injury, we have at heart become a nation of borrowers and not savers. Our only financial salvation may lie in reversing that trend by going back to saving up significant caches of money and complementing that with more achievable mortgage requests. We must learn to live within our means again.
It may sound to you that, owing to the fact that I am a financial and mortgage advisor, I may be shooting myself in the foot, as it were, by saying all this. But the truth of it is that everyone, myself included, would benefit from a more stable property market with attainable mortgages and I see this as the only way that it may be achieved.
What we need to know is, are these two occurrences linked, and if so, how?
Let us first give consideration to exorbitantly overpriced housing market. Just like any other commodity houses are governed by the economic principles of supply and demand. As a general rule, if demand for a product exceeds the amount of the product available then the value of that product will rise. Likewise, if the supply of the product exceeds the demand for that product then the price will fall. These are the fundamental principles behind the capitalist economy.
But how is this reflective of the housing market? Well, over the last decade mortgages have been more accessible to the public, one type of which is the self-certification mortgage. With this type of mortgage it is up to the individual to certify what they earn and this may be open to quite a broad span of interpretation on his part.
House prices have usually been based around the individuals? ability to borrow an amount of money, which in turn was reflective of the amount of their earnings. Now it is fair to say that if in a certain area the average mortgage that can be attained is 100,000 then the average house price will not exceed that, since the money for purchase would not be available unless there were savings available to add to the amount borrowed by the individual.
Self certification has changed that. People have been able to borrow more than they should based on overly generous income declarations, so this has in turn pushed the prices up. Prospective buyers in competition with each other have then become more aggressive in their self declaration and have forced up the amount they bid on the house.
Which leads us on to the credit crunch. Lenders are now placing more restrictions on mortgage purchase and verification of income is compulsory. Due to the previous competition for property and the subsequent inflated house prices people are finding themselves in the situation where they cannot afford the property on the market because their income is insufficient to obtain a mortgage to cover the purchase price.
As a result, the housing market is at a standstill as there is simply not enough money around to buy.
To add insult to injury, we have at heart become a nation of borrowers and not savers. Our only financial salvation may lie in reversing that trend by going back to saving up significant caches of money and complementing that with more achievable mortgage requests. We must learn to live within our means again.
It may sound to you that, owing to the fact that I am a financial and mortgage advisor, I may be shooting myself in the foot, as it were, by saying all this. But the truth of it is that everyone, myself included, would benefit from a more stable property market with attainable mortgages and I see this as the only way that it may be achieved.
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