Subprime Mortgage Crisis Explained

What's in a phrase?

Coined by the media a little over a year ago, the term subprime lending or crisis has gripped the worlds economy. What does it mean?

Wikipedia, the free online enclylopedia defines the term "sub prime mortgage crisis (see this link for full details):

"The subprime mortgage crisis is an ongoing economic problem that became more apparent during 2007 and 2008, and is characterized by contracted liquidity in the global credit markets and banking system. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework.

The "subprime" crisis has played out in several ways:
  • High level of bad debts
  • Credit crisis resulting in loss of confidence in both finance systems and the market place
  • Declining consumer spending
  • Expected lower employment levels
  • Declining interest rates to combat recessionary pressures

Many clients own property either as owner occupiers or property investors. They, like all property owners want to know the effect of the subprime mortgage crisis on them.

A report from Australian Property Monitors today predicted property prices in Australia to stabilise over the short term with possible increases for the second quarter of 2009. The report also expects upward pressure on rents, particularly where housing affordability is worst. Click on this link for reports from Australian Property Monitors.

It is understandable the media is basking in the frenzy. What is unfolding in the world's securities markets is a major event. It is also apparent many of the "experts" just don't know where world events will lead to. While some people in some parts of the world will experience some degree of pain as a consequence of the "subprime" fallout our hope is the Australian economy is as strong as commentators propose.

For many Australian households and property investors, lower interest rates combined with tax cuts and lower oil prices will offer some level of relief for the household budget. The 1% interest rate cut announced by the RBA on Tuesday 7 October 2008 has already impacted property sales. Real estate agents are reporting to us that buyer enquiries have doubled since the rate cut.

By David Maynard

CEO My Tax Zone

Copyright 2014. My Tax Zone.