![]() House price to earnings – One factor determining the underlying affordability of housing is the ratio of house prices to earnings. Therefore, despite a relatively modest rise in US base rates, homeowners saw a double effect – higher base rates, plus end of introductory rates. At the end of this teaser rate, interest rates increased. For the first year or two, mortgages were offered at more attractive rates. A feature of the US housing bubble of 2005 was that many sub-prime mortgages had teaser rates. The Uk experienced a housing crash in both 19, after a peak in mortgage payments. ![]() In the UK, rising interest rates in the late 1980s and 2005-07 saw a sharp rise in mortgage payments as % of income. In the UK about 50% of mortgages are variable rate mortgages, so homeowners will feel the effects of higher. If homeowners take out fixed rate mortgages, they can be insulated from interest rate rises for 2-10 years (depending on the term). A small rise in rates can increase the cost of mortgage payments and make buying a house less affordable. Mortgage payments can take 20-50% of a homeowners disposable income. The main reasons for this include:Ī rise in interest rates. What causes housing market crashes?Įssentially a period of falling house prices occurs when there is a fall in demand for buying houses/more people putting houses on the market. ![]() In recent years, the period 2005-09 saw a prolonged and significant fall in house prices in both the US and Europe.Ī housing market crash can be precipitated by a change in economic fundamentals (higher interest rates, lower growth) and/or a change in market sentiment (confidence turning to pessimism. Despite housing being a secure asset, the housing market can be prone to bubbles and periods of rapidly falling prices.
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