How the Credit Crunch Could Undermine the Housing market

In the US subprime mortgage sector, there have been a record rise in mortgage defaults the consequence of this is that financial institutions have had to write off millions of dollars in bad debts. This has made them very reluctant to lend more money, especially to buy mortgage debt. Therefore, there has been a shortage of funds to finance mortgages. This is particularly a problem for banks who finance a high % of their mortgage through onward selling (rather than through internal savings)

Some now worry that the UK mortgage industry will suffer due to the shortage of funds in the capital markets. UK Banks are finding it very difficult to borrow sufficient funds. This is why the Northern Rock ran into problems. The consequence of this is that interest rates on mortgages could rise - even if the Bank of England cut the base rates.

If this was to occur, it would increase the likelyhood of house prices falls in the UK.

The UK government and Bank of England could face another difficult choice in whether to pump money into the financial sector and avoid the market failure. If it works they could prevent unnecessary house prices falls and make money on the interest. If it fails then they will have lost more public money.

• What Can we learn from subprime crisis?
• More on subprime crisis at Economics Blog
• Interesting article here at the BBC - Credit Crunch and Housing