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Swift BoE action ‘saved’ housing market from ‘severe crash’

  • 13/11/2012
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Swift BoE action ‘saved’ housing market from ‘severe crash’
Despite the severity of the 2008 financial crisis, the housing market has held up relatively well compared to previous recessions because of rapid monetary policy action, an economic adviser has said.

Ruth Lea, economic adviser at Arbuthnot Banking Group said the UK housing market, damaged and still weak, has not suffered as much as it did in the early 1990s.

Lea said: “When the economy sank into recession in 2008, there were several blood-curdling prognostications that the housing market would spectacularly crash. This has not happened, despite weakness and fragility in the housing market, because the Bank exercised its independence wisely.

“The UK is blessed with an independent monetary policy, so damagingly absent in the early 1990s. Indeed it can be argued that the Bank’s ready response to the crisis in 2008-2009, the bank rate was down to 0.5% by March 2009, saved the housing market from a repeat of the early 1990s – if not worse.”

Lea added the Bank’s reluctance to raise rates, even when CPI inflation was running at around 5%, reflected its concern over the fragility and vulnerability of the housing market.

A change in lending practices has also helped to prevent a “severe crash,” said Lea.

“In the late 1980s – early 1990s, perhaps counter-intuitively, the average Loan to Value ratios were significantly higher than in the mid-late 2000s (before the recession). This made homeowners especially vulnerable to negative equity in the early 1990s as house prices fell.”

According to the Council of Mortgage Lenders, around 900,000 mortgaged homeowners were in negative equity at the end of 2008, down on the 1.5m in 1993, though this has recently fallen to around 719,000.

“There is also evidence of forbearance and restructuring of loans by banks when borrowers have been in financial difficulties in the last recession. One of the consequences of the ‘relatively’ benign state of affairs has been the better outcome for arrears and repossessions in the last recession compared with the early 1990s.”

The Financial Services Authority (FSA) recently revealed that severe arrears of over six months occurred in nearly 1.5% of mortgages in 2009, falling to just over 1% in H1 2012. In 1992 they occurred in 3.5% of mortgages.

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