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Opinion: Ten years from the crunch, vigilance is still key


It’s now ten years since the credit crunch of 2007 decimated international markets and pushed the UK into its deepest recession since the Second World War.

As banks cut lending (making it more difficult for buyers to get a mortgage) and the property market began to stagnate, average house prices dropped by 20 per cent over 16 months, whilst transactions fell from a ten-year average of 1.65 million to a mere 730,000 over the 16 months leading to June 2009.

Five years later and the picture remained bleak. The number of properties advertised for sale had fallen by 23 per cent on figures from September 2007, the number of properties sold had fallen by 43 per cent and the number of mortgage approvals had fallen by 51 per cent.

Fast-forward to 2017, and new research by the Savills property company has shown that the UK housing market continues to be shaped by the events of 2007, with lower transactions (around £30bn less than in the previous decade), lending constraints, lower mobility and an increased reliance upon private funding (‘the bank of mum and dad’) for deposit money.

So, what have we learned from the credit crunch and how secure is our future?

The short-term answer to both these questions is debatable. Record low interest rates have led to a worrying upsurge in credit card debt and unsecured loans, with consumer lending levels now exceeding £200bn for the first time since the crisis.

Within this context, a recent report by Moneyfacts for Reuters has revealed that the number of ‘adverse credit’ mortgage packages available on the market has doubled in recent years.

It also found and that demand for such products is steadily increasing, especially in the wake of Brexit (itself an indirect consequence of the credit crunch) and gloomier economic conditions.

In other words, the re-emergence of ‘sub-prime’ mortgage lending represents an inevitable reflection of prevailing market conditions as well as tightening mainstream loan criteria.

According to John Van Kuffeler of Non-Standard Finance, there are currently 12 million people in Britain that conventional banks will not lend to, of whom 2.6 million have incurred problem debts.

If we factor in rising inflation levels and the impact upon real incomes, then mortgage packages that account for credit history pitfalls (from light infringements all the way up to serial default and bankruptcy) seem likely to become increasingly prevalent in the future.

Heightened lender underwriting criteria and affordability testing can help to mitigate the debt risks associated with sub-prime, but there are still concerns within the industry that reckless lending practices could develop new patterns of financial chaos. Only time will tell.

So, are we on the verge of a new credit crunch?

Sub-prime represents just one piece in the overall economic jigsaw puzzle of course, but with rising inflation and debt, falling house prices and a resurgence in ‘shadow banking’ practices in China, vigilance and responsibility need to be heightened if we are to remain financially secure.

Regulation is stricter than ever before, but let’s not take anything for granted- it’s time to open our eyes.

David Edwards is commercial director of Personal Touch Financial Services


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