HOMEBUYERS are facing the most treacherous days in memory, with the risk of the UK sliding into a 1990s-style property slump increasing by the hour.
Mortgage lenders hiked borrowing costs pretty much across the board last week, and increased the hurdles required to qualify for a loan, with the best deals now only available with deposits of up to 40%.
Youngsters and other borrowers who took on
mountains of debt over the past couple of years haven't a cat in hell's chance of remortgaging at a decent rate.
Some are already seeing their repayments rise sharply by up to £1,000 per month. Where on earth do you find another £1,000 per month? Even more established borrowers with smaller loans are having to find hundreds of pounds more monthly.
I hate to tempt providence, but without some drastic rate-cutting action, soaring repossessions on a par with the last recession look inevitable.
When the Bank of England meets this week, it is expected to cut the interest rate by 0.25%, if at all. This will do nothing whatsoever to either bring down borrowing costs, or make it easier to get an affordable loan.
Nothing less than a 0.5% cut is essential to avert a crisis. Even this may do little to cut costs, but it may encourage banks to stop behaving like scalded cats.
We are now paying the most expensive mortgage rates since mass homeownership began. Labour loves to throw taunts about the days of 15% mortgage rates in Conservative faces. But the truth is that today's borrowers are being fleeced at significantly more penal rates.
Labour conveniently forgets that when mortgages peaked at 15%, most were tax-deductible. Basic tax at 33% left borrowers actually paying 10%.
With the key mortgage-setting rate (which is not the base rate but Libor, the rate the banks charge to lend to each other) currently at 6%, many borrowers will soon find themselves paying something in the region of 7.5%, unless Libor is brought lower.
The gap between 10% and 7.5% doesn't give much to boast about.
But it is much worse than that. When borrowers were paying this notional 15% but actual 10%, inflation was running at 11%. In other words, we were paying negative interest rates because annual wage inflation quickly wiped the pain away.
By contrast today, with inflation at 2.5% and salary increases pegged at that level, borrowers are paying 5% real interest rates, which will take years for inflation to erode. Ouch.
The strain on household budgets is showing. Debts on credit cards and overdrafts last month rose faster than at any time on record; a clear indication that families cannot meet their bills. It is only a matter of time before increasing numbers begin to drown in a sea of debt.
Other savings have slumped. According to the Prudential, pension saving has halved. This is all seriously alarming, and it is time the Treasury and Bank of England acknowledged the perilous pass they have brought us to.
They are directly responsible for encouraging millions to take on massive debts by setting a framework which allowed mortgages to be priced too cheaply. This triggered a property bubble and lured millions into a nightmare debt trap. Surely culpable in its creation, the bank now has a duty to do everything it can to avert this crisis.
To be fair to the Bank of England, the Treasury forced it to set interest rates by shadowing the CPI inflation index, in which housing costs are stripped out. History will judge this a major strategic error which kept interest rates too low for too long, feeding a credit binge which pushed house prices up for an unprecedented 15 years, amid boasts that we had abolished the cycle.
If only I had a pound for every time I've heard politicians and financiers make that boast over the years. When will they ever learn you never bust the cycle?
The International Monetary Fund last week warned that governments and central banks could have done more to prevent property bubbles, and could do more to ease the current lending constraints. Something of an understatement in the context of the UK.
So all eyes will be on the Bank of England this week. It is not oblivious to the horrors facing borrowers, having predicted that the credit crisis will worsen over the next three months, with half of all lenders expected to ration loans.
To avert catastrophe, lenders must be made to open their doors again, and for that we have to get Libor down. An interest rate cut of 0.5% is the very least first step necessary.
Of course there are risks. But as my doctor always says, diagnosis is about prioritising the various risks and treating the one which looks most critical. Right now that has to be the prospect of a property crash.
The full article contains 834 words and appears in Scotland On Sunday newspaper.
