What started off in the U.S has now spread throughout the different economies, as one economy after another tumble due to tightening credit conditions. Even though when speaking about the recent housing slump, most people associate it with the U.S and the subprime crisis, many are unaware of a similar situation that has also occurred in the U.K. Similar to the low rate environment in the U.S, central bankers and politicians in Britain kept their interest rates artificially low, allowing opportunists to take advantage of it, borrowing huge amounts- much larger than the value of their real invested assets. From private equity firms to simple investors, money was scattered within a housing market as those investors that took advantage of the credit conditions, thought that in years to come the sector would yield back sufficient profits due to rising prices. As the word spread, additional investors "jumped on the train" as landlords who had bought houses with the intention of letting them out (BTL) saw their investments gain enormously in value. From 1995, a trend of housing investments formed across the country, as people with different credit ratings were able to receive loans to take part in this investing “opportunity”. The housing market quickly became an extremely popular investment route as savers would rather put their money in rising assets then save it in traditional saving plans.
Over the years, up until 2007, a low rate environment quickly changed due to rapid growth, as central banks across the globe used their primary tool (interest rates) to control the expanding economy. In addition, during that time house prices were rising fast, yielding investors enormous returns on their initial investment. Despite the optimistic situation not all was as it seemed; as rent in certain regions across the country failed to cover off loan payments, landlords were often forced to re-mortgage their investments at higher rates. In addition, new homeowners were struggling to enter the market due to high prices and unaffordable mortgage conditions. A basic economic principle shows us that when supply becomes too high and demand becomes too low - prices drop.
Once rumors of decreasing prices and expectations of an upcoming economic slowdown begin to spread, it doesn’t take long for people to realize that their best option is to cash in on recent profits. Selling pressure will often turn into a selling frenzy as holders search for buyers that have often disappeared far into the distance, waiting to purchase at much lower prices. High interest rates and decreasing house prices normally lead to only one outcome – catastrophe.
Soon after, a housing slump will often lead to a credit market crash as homeowners fail to repay their mortgages, while the values of their homes drop in price.
Taking a glance at the chart below one can see the recent drop in house prices towards the middle of 2007.
To date the credit crunch has hit the housing sector hard as mortgage deals once known to be easy have flip-sided, making it virtually impossible for new home owners to receive a mortgage. This chain reaction has added to the problems as central banks are now forced to deal with slow economic growth. The Bank of England slashed yet again its key lending rate last week by a full percentage, bringing it down to a rate last seen only 70 years ago. Unemployment in the U.K has risen dramatically as the economy has contracted, forcing employers to cut back on their labor force. Among all the European economies the U.K has dropped the most, dragging its currency and stock market down by enormous proportions. The once high valued Pound Dollar pair is now trading at levels last seen during 2001 and 1993.
Technical view
Over the last couple of months Pound pairs have dropped tremendously, now coming up to monthly support. In addition, from the beginning of this economic slowdown, we have witnessed a strong correlation between the U.S market, the FTSE and the Pound. Current levels in global stock markets are pointing towards temporary stability, especially after Friday’s shocking U.S Unemployment data, which failed to bring down the markets. The U.S market closed the session up by over 3%.
Even though further sectors could push the panic button, once expectations fully price in the recent occurrences we could see yet again a bullish correlation between the three.
Up until then, the major question is whether support at current levels will manage to hold?
Best
Dojit
Dojit - Uniting Trading Ideas, Forex school, Forex education, Economic articles
Over the years, up until 2007, a low rate environment quickly changed due to rapid growth, as central banks across the globe used their primary tool (interest rates) to control the expanding economy. In addition, during that time house prices were rising fast, yielding investors enormous returns on their initial investment. Despite the optimistic situation not all was as it seemed; as rent in certain regions across the country failed to cover off loan payments, landlords were often forced to re-mortgage their investments at higher rates. In addition, new homeowners were struggling to enter the market due to high prices and unaffordable mortgage conditions. A basic economic principle shows us that when supply becomes too high and demand becomes too low - prices drop.
Once rumors of decreasing prices and expectations of an upcoming economic slowdown begin to spread, it doesn’t take long for people to realize that their best option is to cash in on recent profits. Selling pressure will often turn into a selling frenzy as holders search for buyers that have often disappeared far into the distance, waiting to purchase at much lower prices. High interest rates and decreasing house prices normally lead to only one outcome – catastrophe.
Soon after, a housing slump will often lead to a credit market crash as homeowners fail to repay their mortgages, while the values of their homes drop in price.
Taking a glance at the chart below one can see the recent drop in house prices towards the middle of 2007.
To date the credit crunch has hit the housing sector hard as mortgage deals once known to be easy have flip-sided, making it virtually impossible for new home owners to receive a mortgage. This chain reaction has added to the problems as central banks are now forced to deal with slow economic growth. The Bank of England slashed yet again its key lending rate last week by a full percentage, bringing it down to a rate last seen only 70 years ago. Unemployment in the U.K has risen dramatically as the economy has contracted, forcing employers to cut back on their labor force. Among all the European economies the U.K has dropped the most, dragging its currency and stock market down by enormous proportions. The once high valued Pound Dollar pair is now trading at levels last seen during 2001 and 1993.
Technical view
Over the last couple of months Pound pairs have dropped tremendously, now coming up to monthly support. In addition, from the beginning of this economic slowdown, we have witnessed a strong correlation between the U.S market, the FTSE and the Pound. Current levels in global stock markets are pointing towards temporary stability, especially after Friday’s shocking U.S Unemployment data, which failed to bring down the markets. The U.S market closed the session up by over 3%.
Even though further sectors could push the panic button, once expectations fully price in the recent occurrences we could see yet again a bullish correlation between the three.
Up until then, the major question is whether support at current levels will manage to hold?
Best
Dojit
Dojit - Uniting Trading Ideas, Forex school, Forex education, Economic articles
