Mortgages account for such a huge amount of bank lending, meaning that if prices were to plunge, Britain could find itself back in the depths of a credit crisis.
This is not a theory that is out of this world. Already, sterling is at a 31-year low, and companies and banks are either cutting jobs or are warning of cutting jobs due to Brexit.
HSBC released a huge chartbook this week detailing the state of the UK housing market as of October and nestled within the report is a key table showing how integral housing is to the financial system due to the amount banks lend to people to buy a home.
Here you can see that mortgage lending accounts for two-thirds of all bank lending:
While HSBC economists say that this proportion is falling, it is still hideously huge for banks. So in other words, if people could no longer afford their mortgage payments due to an interest rate rise or if they lose their jobs, then it could cause huge ripple effects across the wider financial system — something similar to what we saw during the 2008 credit crisis.
Interest rates are now at a record low of 0.25%, after being at a previous record low of 0.5% since 2009. This makes it cheaper for people to borrow money and to service their debts. So right now, things look great for the ordinary Briton.
However, on June 23 a slight majority of Britons voted for a Brexit and this has caused a seismic shock across the country. Nobody knows what a Brexit is going to look like for the UK as official negotiations do not start until Prime Minister Theresa May triggers Article 50. When she does it will start the two year negotiation period.
Economists, analysts, and investors are not optimistic about the outcome for the UK because government officials, including the prime minister, are steering hard and fast into a “Hard Brexit” — leaving the EU without access to the Single Market.
But Britain needs the Single Market, even the Treasury has pointed out that a “Hard Brexit” will cost the UK £66 billion ($81.2 billion) a year in lost tax revenues. On top of that, there is talk that Britain may end up paying billions to the EU anyway in order to manage its exit.
GDP could fall as much as 9.5% cumulatively in the coming years warns the Treasury — so things are not looking rosy.
So even if interest rates are ridiculously low now, if a swathe of Britons lose their jobs or find it hard to keep up with payments, it could seriously kill off prices and in turn hurt the banks if they can’t pay the money back.
And we have seen this all before — back in 2008.