The credit crunch is set to get even worse.
In a week where we've seen some lenders pull out of the mortgage market altogether if temporarily and others raise interest rates substantially in the hope of putting off customers, many borrowers may be wondering how much worse it could get.
But according to the Bank of England's latest quarterly Credit Conditions survey, over the next three months lenders expect to cut lending further, raise charges, and be more demanding on terms, such as hiking deposit levels, for example.
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So it's little wonder that the IMF reckons Britain is one of the countries most vulnerable to a property crash
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Along with France and the Netherlands, the IMF believes Britain has one of the world's most precarious property markets. It calculates that at least 30% of the value of homes cannot be explained by fundamentals such as demand or rising incomes, reports The Times.
Of course, this has been obvious to anyone with any sense and has been for a long time. High house prices aren't about supply and demand, or rising incomes they've been all about availability of credit for years now. And that's vanishing rapidly, even for wealthy buyers. C&G now demands a £200,000 deposit if you want to borrow £1m, double what it was at the start of this week. So much for the unassailable London market.
The worst fall in commercial property prices in 20 years
As David Wighton points out in The Times, if residential housing follows commercial property, then times are set to get very hard indeed. Since June last year alone, the average commercial property price has fallen by 15%, according to the Investment Property Databank. The City reckons that by the end of this year, prices will have fallen 26% in 18 months.
This is the worst fall in commercial property prices seen since records began. That was a little more than 20 years ago, but of course, that includes the recession of the 1990s. And most of this has so far been driven by the credit squeeze, though it will soon be exacerbated by job cutting in the City and banks reining in expansion.
If the commercial property crash has so far been worse than the 1990s, then it's not much of a jump to imagine that the coming residential housing crash could also be worse.
Business owners are suffering too
But mortgages aren't the only things that banks and financial players need to worry about. Banks have apparently seen default rates on medium-sized and large companies rise more sharply than expected over the past three months.
The same over-confidence that infected the mortgage market also seeped into all other forms of lending. At the high point of the credit bubble, lenders were happy to dole out large sums of money against minimal assets at tiny interest rate levels. Now the same credit squeeze hurting commercial and residential property owners is also squeezing business owners.
Consumers are borrowing desperately to pay their bills, via the only route available to them. The surge in personal loans and credit card borrowing in February (up £2.4bn from £900m) wasn't down to consumers going on a retail bender. It's because they can no longer remortgage cheaply to help them pay the bills. Now they need to move towards more expensive forms of credit. The same thing happened in the US as the mortgage market dried up there.
This is what happens in a credit crunch. Debts that people believed they'd never have to pay off suddenly crystallise, as refinancing becomes impossible. And for many people, those debts simply won't be affordable. Particularly as the businesses employing them are facing the same problems, and are unlikely to be able to increase wages to compensate, even if they wanted to.
While energy and food prices may well continue to rise, ultimately this scenario of falling house prices, and little real growth in wages, is a recipe for deflation, as James Ferguson points out in the latest issue of MoneyWeek. And that has serious implications for your investments. If you're not already a subscriber, you can get your first three issues free by clicking here: Free trial
Turning to the wider markets
In London, the FTSE 100 fell 24 points to close at 5,891. Retailers were among the main risers after gains earlier in the week.
Across the Channel, the Paris CAC-40 fell 25 points to end the day at 4,886. And in Frankfurt, the DAX-30 shed 35 points to 6,741.
On Wall Street, US stocks were little changed, despite first-time applications for unemployment benefits rising to levels not seen in more than two years. The Dow Jones gained 20 points to end at 12,626. The broader S&P 500 climbed 2 points, to 1,369, while the tech-heavy Nasdaq rose 2 points to 2,363.
In Asia, Japanese stocks slipped back, with the Nikkei down 96 points at the close, at 13,293.
Crude oil was trading at around $104.34 this morning, while Brent spot was broadly flat, at $103.28.
Spot gold was trading at back above the $900 mark, climbing to $906 an ounce this morning. Platinum was also higher at around $1,979, while silver was trading at $17.44.
Turning to forex, sterling was trading at 2.0025 against the dollar, and at 1.2739 against the euro. The dollar was last trading at 0.6363 against the euro and 102.32 against the Japanese yen.
And this morning, British nuclear group British Energy has risen sharply amid reports that Electricite de France has been given approval to bid for the company.
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