Sunday, Mar 30, 2008
Competing to be the worst deal
Independent: 'Vicious cycle' for borrowers as more mortgages are withdrawn
As mortgage companies compete to avoid business, could the internet be taking a new role? Price comparison sites were not around last time. Now, you can find out the best deal in a few seconds. This will speed the feedback process of banks withdrawing best deals literally to the speed of light. The second a lender pulls the best deal, another lender, who is now the best deal, gets inundated, and pulls their product or puts up rates, and so the cycle continues, until when exactly? The viscious cycle means even more deflation, which makes assets yet more risky, and so the trough should be greater for this and other reasons this time around.
Posted by planning4acrash @ 10:17 PM (633 views) Add Comment
9 Comments
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1. mark wadsworth said...
Good find! The internet will have a huge effect on this, as you point out.
2. growler said...
This is why I think this time around the crash will be faster and more furious.
Last time around there was no internet, and you had to rely on papers, the news on TV or chat in the pub.
Imagine the newspapers if this is all you could read?
3. dohousescrashinthewoods said...
I guess a stronger feedback loop could create a deeper trough. If companies are moving too fast, they would be more likely to overshoot.
If so, that means the crash would happen a lot faster and be sharper and harder than ayone could predict from past experience. I guess the speed with which the credit crunch is taking hold gives this some plausibility.
On the other hand, faster feedback could dampen the overshoot, so quick crash, hit bottom, stay there.
I still fancy the scenario of saving up a "deposit" (in today's values and probably not held in pounds) over the next couple of years but then finding I can buy a house for cash. Dreadful thought for owners and BTLs, but what joy for anyone who has been prudent, seemingly against the odds, just wanting a home, peferably without a lifetime of debt to go with it and preferably without ending up paying double the price of the house over the lifetime of the mortgage.
I always thought that was the nastiest aspect of credit - "can't afford it? Don't worry, we'll buy it for you, and you can pay double". Credit only seems to work when the borrowed money is invested to generate value in excess of the interest charged - effectively risk-and-profit-sharing, otherwise it's daylight robbery by simply over-charging people who can't afford it (and may not even understand what is happening) - by which I include Surrey mummies, not just "the poor".
4. wiltshire said...
I've always thought the fact we are in The Information Age would be a very interesting additional factor in any economic/house price downturn this time round. Northern Rock is a brilliant example, had a similar thing happened 15-20 years ago most people in the UK would have seen The Chancellor and the banks CEO on the television saying "everything is fine" and gone back to sleep. Now, 30 seconds on the internet and you can find a hundred different opinions and they're not all going to be as positive as the spin from government etc. As mentioned above the internet is going to impact on the mortgage market and probably in many other ways too. It's just another reason why it really is different this time but not the reasons the VIs hoped.
5. paul said...
"The viscious cycle means even more deflation"
It's a vicious and viscous cycle, agreed p4c.
6. planning4acrash said...
Ah, so you noticed the obvious mistake! (oops!!), at least it shows that I wrote that blurb!!!
By the way, Northern Rock may well be different. No doubt it was a staged event, wouldn't you stage a bank run to get 100bn off the govt?! Basically mortgaging the country for bankers. Wonder if that's the info that old Blairy gave to JP Morgan.
7. drewster said...
Does the internet really make that big a difference to finding the cheapest mortgage? For many years now the Sunday papers have published "best buy" tables showing the cheapest mortgages, cheapest personal loans, and best savings accounts.
I think where the internet makes a real difference is sites like www.houseprices.co.uk, which let you find out how much properties really sell for.
8. Fed Up said...
Borrowers with secure employment and a reasonable amount of the mortgage paid off need not worry. It is those with little or no money, who should never have been offered a mortgage in the first place, who will find themselves the most vulnerable. Oh and the BTL fools whose mortgage pyramids will collapse
9. uncle tom said...
It does appear that the mortgage lenders are running away from the money markets as a source of funds as fast as they can. The total number of mortgages being taken out is currently tiny, yet the lenders are openly shying away from writing new business.
But they've got a very long way to run - about 25% of all UK mortgage lending is funded by the money markets, as opposed to savings accounts.
I'm wondering how long this will take to unwind - it would seem that the lenders are wholly unable to write a 'normal' amount of business now.