Housing market: Is credit crunch mark II on the way?

9th August 2011

The downgrade of America's debt combined with economic turmoil in countries such as Portugal, Italy, Greece and Spain could have a dire effect on the UK banking system.

Share prices plunged last week after European Commission president Jose Manuel Barroso admitted the euro crisis may spread.

Bond prices fell in Italy and Spain. This means the effective interest rate on those bonds – the yield – rises and this indicates the likely cost to that country of any future borrowing.

The first credit crunch in 2007 saw a number of big names go to the wall including Lehman Brothers and Northern Rock.

Meanwhile consumers found it more difficult than ever to borrow money. If history repeats itself so soon it could stall the flagging economic recovery and pile on the pain for consumers and potential homebuyers and other borrowers.

Ray Boulger of leading independent mortgage adviser John Charcol , explains what happened at the onset of the credit crunch four years ago:

"One impact of the Lehman debacle nearly three years ago was a freezing of the wholesale money markets, causing banks and building societies to beat their biggest ever retreat from mortgage lending.

"This resulted in the collapse of net mortgage lending from £109bn p.a. in 2007 to only £8bn last year.

"One specific impact was that lenders virtually withdrew from offering high loan-to-value mortgages and as a result many would be first-time buyers have been unable to enter the property market, even though their monthly payments would in many cases have been comfortably affordable."

Writing in Scotland on Sunday the newspaper's business editor Terry Murden said Friday evoked memories of 2008, with share prices yo-yoing all day and investors unclear whether to buy or sell as nothing and no-one seeming to provide any sense of direction.

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