Since the mid-late 90’s Britain experience a significant growth in the housing market. Not only was this determined by the sheer increase in the purchase price of the property but also the amount of houses being built. During the labour government we also saw an increase in the legislation for the housing market. So why did all of this occur? What was the driving force behind it?
Firstly, it was down to the fact that Britain became the home to many of the migrant workers coming in from the European Union. Yes, these are the likes of the Polish, Czech and Slovakians whom had left their countries to work in the British labour market. So at one end of the market we have an increase in population which obviously now needs to be housed. We can be satisfied with people living on the streets like they would in the undeveloped countries.
Next, many have argued that the average British family only has two children. So if this is the case is there any point in purchasing a vast property? My answer to that is no. Bearing that in mind would apartments not be more suitable for smaller families as they have something in common with the others living in the same building or block? Yes. It is worthwhile noting that many parents had become working professional and were no longer working in the manufacturing industry but instead in the service sector. Therefore, the property that they lived in must satisfy their social needs. The common terraced house was constructed predominantly for people working in factories that were once the cogs and gears helping Britain’s presence known worldwide and a storming export sector.
Thereafter, we have a market known as the “Buy to let” market. This is when an individual purchases a property to put it back out on rent and earn income from it. They still have a mortgage to pay but many banked on the fact that if the price of the property increased for which many it did then they would be able to sell it off and make a quick profit from it. Banks were very encouraging for this market as the deposit required was a mere 10%. As we had many coming in from abroad who could not afford housing, rental seemed like the next best alternative and this only helped fuel the bubble even further.
Now that we have gathered that there have been a few common factors in the housing bubble, the question everyone is most concerned about is that why did it pop?
It fairly obvious to begin with that when you have a bubble that is growing at a steaming rate then surely one day it will get so big that cracks will appear and BOOM ! Before you know it pops in your face. But why did this happen?
Well, many of the banks that lent out funds for individuals to purchase the properties were lending to those who did not have a great financial history. For instance, they have a poor level of proven credit worthiness, they may have had CCJ’s in the past or more so they did not have a regular income. Whilst the going was good and we experienced prosperity during the labour government in the mid 90’s this formula to lend to anyone and everyone was great. No one could have asked for anything better. However, when they could pay the monthly mortgage payments it then became a problem. This is because those who were migrant workers then decided to go back as they could receive a better wage back home in their country of residence and the standard of living was better for a lower rate. Perfect for anyone who misses their national dish cooked by their own people. Also, with the banks unable to gather these funds from the home owners they began experiencing a poor cash flow. This meant that they were finding it tight to fulfil their balances at the end of each working day and were required to borrow from the overnight market at the LIBOR rate.
Let’s get something straight here. When you buy a house and the banks hands over the keys to you; you pay a mortgage on the property. The bank is using money from savers and investors to give you the ability to pay and charges to interest which is gives a little to the savers and keeps the rest as a profit for being the financial intermediary. The profit the bank generates it was to earn more so it invests itself in other places. It may lend abroad to projects that are deemed to be successful, it may lend more in the form of mortgages or it may also keep it to help its cash flow. Now if the banks begin to experience a loss on the mortgage the savers and investors will not be pleased so they will flee and put money in another institution. In order for the banks to attract them back it has to offer a higher rate of return on investment (ROI) for them. This is where it begins very risky, it is a little like playing poker and when you are losing you bet even harder to try and bluff yourself into the favour. The bank at this step now starts lending even more but in a vigorous manner. It lends people more than they need so that many it can attract a form of revenue and custom. However, as always this proves to be unsuccessful and the plan fails. The bank then goes into a state which it has to ask the Central Bank for aid to help prop it up or better yet secure a bailout.
This is what happened with Northern Rock. It was unable to meet its daily need and required funds from the BoE of a regular basis. The reason why was simple: it lent to the wrong people! When you add toxic waste to a clean river the river becomes intoxicated and thus is no longer of use. Exactly what happened here where Northern Rock prior to the recession had the safest mortgage book but greed led them to be aggressive and they ended up spelling poison over their mortgage book.
In a nut shell, the housing bubble popped because it was being grown too quickly at a rate this was not sustainable and more so people did not think in forth sight what the future will hold. With the lack of knowledge of the economy and this bubble just growing with greed of a higher price in the future many households lost out but even more it drove the economy down into a duster. At this very moment in time the impact of the housing bubble are still present as we see house prices still failing on a regular basis due to the fact that people can no longer afford to occupy them. It just a game of demand and supply where the supply is restricted as it takes time to build a house but the demand is so great that it outright the supply in many folds. Hence, to restore equilibrium the price rises.