Could shake-up in mortgage lending spread across the Atlantic?

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by Kay Murchie

Analysts anticipate prices falling around 10% in America’s property market and if this happens, many believe it would be an asset deflation in the US never seen since the Great Depression. The downturn has uncovered large gaps in the country’s mortgage market, especially in the sub-prime sector and the consequences are still unfolding.

Britons are now concerned that the shake-up in mortgage lending could spread across the Atlantic. Analysts believe the answer is yes and no. Yes, this will affect the demand side, risk has been repriced and organisations are not going to allow cheap credit, as they have done in the past few years. This pattern is not restricted to the USA.

A spokesperson for RBS Financial Markets sees a tightening of lending conditions whereby mortgage companies will insist on tougher earnings multiples as their funding from the wholesale markets dries up. That will mean a widening of the spread between interest rates on mortgages and the base rate.

It is now looking less likely that the Bank of England will increase interest rates so the net effect may be little different. However, Britain’s market will be cushioned by supply conditions, which are significantly different to those of America. A report from American Express said that housing supply has risen by just 20% in Britain over the last 7 years, compared with a 42% rise in America.

RBS Financial Markets concluded that a construction squeeze has thus far kept Britain from suffering the same outcome and it could stop a slowdown turning into a crash. However, Ireland may not be so fortunate - housing supply rose an incredible 210% over the same 7-year period.