Credit crunch news

In a nutshell, a "credit crunch" occurs when banks/financial institutions suddenly reduce the availability of loans (either to consumers or to businesses), or suddenly increase the cost of obtaining loans.

There are many reasons why this situation may occur. Firstly, the banks may start to consider collateral used to secure loans as being worth less. Secondly they may also consider there to be an increased risk with relation to the solvency of other banks within the banking system. There may also be changes in general monetary conditions, such as increased interest rates or rules imposed by governments/central banks which may also lead to this type of situation.

The credit crunch scenario may manifest itself after a "boom time" period of lending, where banks and financial institutions have been lending freely to customers who are usually considered to be high risk. This type of careless lending can result in debt and losses when/if bad debts occur. In extreme circumstances, banks who have a high number of bad debtors may find themselves in a situation where they are unable to make any further lending.

A credit crunch most often occurs when there is a reduction in the market prices of previously "overinflated" assets, and the term refers to the financial crisis that results from the price collapse.

A liquidity crisis happens when an otherwise sound business finds itself temporarily incapable of accessing the bridge finance it needs to expand its business or smooth its cash flow payments. In this case, accessing additional credit lines and "trading through" the crisis can allow the business to navigate its way through the problem and ensure its continued solvency and viability. It is often difficult to know, in the midst of a crisis, whether distressed businesses are experiencing a crisis of solvency or a temporary liquidity crisis.

The reason the credit crunch can affect so many people, is that the squeeze on lending makes mortgages harder or in some cases impossible to obtain which stagnates the housing market. Also the reluctance of banks to lend money or bridging loans to otherwise strong businesses could result in insolvency.

In a simplistic view, the credit crunch can be seen as "redressing the balance" - reeling in the economy from unhealthy growth especially in the property market. True there are many victims of this type of situation, but the majority of individuals and businesses will just tighten their belts, weather the storm, and hopefully come out the other side stronger and wiser.

One of my businesses is involved in selling ski chalets to Brits in the Northern French Alps. Over the last 5 years, the market has been extremely buoyant, with prices going up 20+% per year and demand well out stripping supply.

However, in 2007 sales started to slow, and although prices didn't fall, the rate at which prices went up fell to a modest 5% per annum. We in the industry attributed this to a number of obvious factors:

1) The over buoyant market forcing prices up a little too quickly.

2) The fall in the value of the pound against the euro making property prices more expensive to Brits.

3) The fall in value of stocks and shares and the cancellation of many city bonuses leaving potential purchasers with less disposable income.

When the credit crunch started to really take hold in the UK at the end of 2007, the media jumped on the bandwagon and forecasted doom & gloom including (but not limited to) house price falls and a general tightening of belts throughout the country. Out in France, we assumed that the obvious knock on effect would be that the property market would start to stagnate, prices would start to fall, and 2008 would be a pretty lean year.

How wrong we were! Almost from the word go, 2008 has proved to be an excellent year for ski chalet sales, bucking all forecasts and pushing up property prices in the Northern French Alps. We are not back to the boom time of 2005 and 2006, but we certainly aren't far off.

So why should this be? We think we can attribute this to a couple of simple facts. Investors are currently wary about putting their money into the stock markets or even into banks. So property seems like an obvious "safer" investment option. However, with the UK property in a spot of disarray, investing in the French property market, especially in an area where prices have carried on going up, is once again an attractive proposition.

This may be quite a simplistic view of what is happening, but for those people with chalets to sell, the Credit Crunch isn't such a bad thing%u2026