A credit crunch can severely damage the mortgage market of a country. As consumer confidence tumbles and affordability is stretched, house prices begin to come down.
The 2007-2008 credit crunch severely influenced the UK mortgage market. Following an era of cheap and, in some cases, irresponsible lending the nature of the UK mortgage market changed in a number of ways.
The cost of wholesale funding soared. Meaning mortgage lenders had no liquidity with which to lend money. The Bank of England base interest rate increased, and in response lenders raised standard variable rates.
The size of the mortgage market shrunk considerably, with hundreds of deals pulled off the market by concerned mortgage lenders. Different sectors of the UK mortgage market reacted differently.
The sub-prime and particularly the heavy adverse credit mortgage market dried up as lenders became increasingly more risk averse, taking pointers from the collapse of the US sub-prime lending market.
Some products became rarer and eventually disappeared from the mortgage market entirely. These included 100 per cent mortgage loans and anything over 100 per cent, such as the ill-fated Northern Rock.
Mortgage lenders face major financial problems, and had to be rescued / nationalised by the government. Starting with Northern Rock, many major lenders faced slumping share prices.
Leading buy to let mortgage lender Bradford & Bingley also had to be nationalised, and the Bank of England and Government initiated a massive financial bailout.
The level of mortgage lending slumped, as more and more buyers, particularly first time buyers, stayed out of the market or were kept out of the market.