Mortgage Crisis
In terms of constant price growth and real estate market supply banks actively promote their “reasonable housing” campaign. A most loyal underwriting system is being formed, credit rates decrease to the minimum, and the initial mortgage installment rate goes down to zero. As a result, a great number of people wish to buy a flat, even those who can’t stand it financially. Gradually, non-payment crisis develops due to some psychological and certain economic reasons. Banks try to get rid of real estate, but all the potential customers are already up to the neck in debt. So it comes to a paradox: supply exceeds the solvent demand, and finally the real estate market breakdown sets in, let alone financial market of the country on the whole.
Great Britain was first to experience the so-called mortgage loan crisis. At the end of 1980s real estate prices fell down first by 26% and then by 11% more. The main reason was unemployment growth, which led to the fact that many borrowers were not able to meet their obligations. Mortgage banks had to expropriate 400 000 houses and flats leaving every forth debtor at a loss. Banks in their turn encountered the problem of selling real estate at a low price due to insufficient demand. Interest rates reduction helped to regenerate the market, as desire to have one’s own house and mortgage loan availability dragged even not well-off families into the real estate “game”.
The similar critical situation was observed in the US in the 1970s accompanied by the mass failure of loan and savings institutions. The government undertook loss compensation, however this cost each taxpayer about $1000. At the end of 1990s average house cost in the US made up $158 000. Housing cost grew steadily by 7,5% a year which made housing in the US even more expensive – $182 000 on average. At that time real estate overestimation and failure to pay back mortgage loans caused banking system crisis followed by the whole economy breakdown. Japan unintentionally helped the US to get over the crisis by having invested about 75 billion dollars in the US real estate between 1985 and 1992. This fact, however, served as a crisis catalyst in Japan itself.