Most notable among the many reason for the global downturn, was the spectacular collapse of the housing market in the United States of America. Families were turned out of their homes because they could no longer pay the rent or mortgage. Firms faced closure because the customers were all swallowed up by the vagaries of the economic downturn.

Credit became even scarcer than it had ever been and banks were already prepared with their refusal letters even before the loan applications were received. Real estate investment became a dirty word and investors were very reluctant to venture again in that business. Houses in Spain were being bought and sold at extraordinarily low prices.

What Went Wrong ?
Investor confidence was one of the key issues that drove the unsustainable levels of household debts. For some reason people began to believe that they could spend money without earning. That somehow there was a line of credit that never ended and would never end. The believed that they had the ability to ignore sound advice from the experts about not over extending their bank balance. The end result was that most households could not sustain their expenditure, let alone the debt. Bankruptcies were dully declared and the real estate investment sector became a no go area.

The people who managed the real estate business themselves had a role to play in the collapse of the market. Of particular interest was the fact they did not hesitate to buy houses at way above market levels in the anticipation that the market would always improve. Of course the prices they paid for the houses bore no relationship whatsoever to the real market value. Thus when the market collapsed and they started to sell, the losses were legendary.

The buy to let market was particularly hit by the downturn. In the late 80s and early 90s many property investors made plenty of money by simply buying houses and then letting them at exorbitant rates. The waterside development was particularly liked. This caused the market to overheat. There were no price controls, no rules and no obstacles preventing people from making the most outlandish investment decisions. When the collapse arrived, all those houses had no one to rent them and even those who wanted to sell could not find buyers.

Homeowners were also busy extending their mortgages to extraordinary rates. Credit cards were being tied to the equity in the houses. Sometimes the homeowner would have made such big strides in creating equity after a long period of saving and scraping. However when the boom in credit services arrived, most homeowners decided that it was time to take the equity out of their homes and use it in other ways.

The term “mortgaged to the hilt” acquired a new sinister connotation. Of course the houses were now stripped of their equity and all that remained was the final humiliation of repossession and bankruptcy. Such was the ignominy that many swore never to enter the real estate investment business again. The process of investment within the real estate sector will take decades to rebuild after the disaster.