Credit Crunch on UK Residential Property Dissertation

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¶ … credit crunch on UK Residential property: Is there an opportunity for the buy-To- let?

The effect of the credit crunch on UK residential property: Is there an opportunity for the buy-to-let?

The economic crisis which emerged within the American real estate sector has expanded throughout the world and it has even come to impact the residential real estate sector in the United Kingdom. The manifestation here is however different, due to elements of particularity, namely the housing crisis and the national dependence on the real estate industry. In this context however, a new opportunity is identified, that of buy-to-let purchases, which are however only perceived as a temporary interest and opportunity for investors.

Introduction

The twenty first century has brought about a wide array of challenges for the modern day population. It is for instance a time of massive technological developments, which impact all features of life. It is also a time in which globalization leaves its deepest mark, but in which cultural differences and terrorism are mostly threatening.

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At an economic level, the century has brought about one of the most severe crises, easily compared to the Great Depression of 1929-1933. It has commenced within the United States real estate sector and it gradually expanded to the totality of American sectors, and eventually throughout the rest of the world.

Dissertation on Credit Crunch on UK Residential Property: Is Assignment

The root cause was constituted by the issuing of subprime mortgages by the American banks, and this gradually snowballed into one of the greatest crises of the modern history (Rayner, 2008). The commencement of the crisis was felt in the United States in the third quarter of 2007, at the level of the American financial industry. Also at that point, the first shock waves were sent to the rest of the world. The immediate impact was that of banking institutions restricting their operations, increasing the costs of borrowing and generally reducing the circulation of liquidities in the market.

Countries were impacted at various degrees by the crisis. A trend which has been observed was that of major impacts on the highly liberalized countries, which activated intensely within the international market, and which as such, relied much of their economic stability on the stability of their partners. States which on the other hand maintained their distance and implemented more prudential policies suffered less intense impacts of the economic crisis.

The United Kingdom was severely impacted by the internationalized economic crisis and its manifestation here was similar to that in the United States. Specifically, the crisis commenced within the real estate sector, correlated with problems in the financial sector. The first victim was constituted by Northern Rock, one of the largest (fifth, to be precise) mortgage lenders in the United Kingdom. The institution became unable to financially support itself and its customers and sought assistance with the Bank of England. As a prudential policy however, the Bank of England did not lend any money to Northern Rock, but precipitated its collapse, and forced its ultimate nationalization (Giles, 2003).

At a national level, the housing industry in England followed a descendant path, in which financial institutions became more restrictive in the processes of granting mortgages. The unavoidable effect was that of a decrease of the operations in the real estate market, as the demand suffered reductions. In a numerical figure, Halifax lending mortgage lender stated that the drop in the prices of real estate properties was of 10.9 per cent (hbos, 2008).

In this context, a question is being posed relative to the specifics of the means in which the internationalized economic crisis has impacted the real estate sector in Great Britain. In this endeavor, special emphasis would be placed on the South East of England. Additionally, the underlying purpose is that of identifying whether the downturn in the real estate industry has created a situation in which it is likely for a specific sector to develop -- that of buy-to-let. In order to answer these questions, gradual research stages are completed. At a primary level, the background information is introduced. Secondly, the available literature is researched and the most relevant findings are presented and detailed. Third, the research methodology is presented; findings are drawn and finally discussed. The endeavor comes to an end with a section on concluding remarks which restates the most important findings of the research process.

3. Background information

The British real estate sector is a complex one, with a long lasting history. It has not only come to develop itself, but it has also managed to set the basis of forming the real estate sectors in the four major countries: the United States of America, Canada, New Zealand and Australia. Throughout the years, the legislations and manifestations of the real estate sectors have suffered various modifications, but their origins can be historically traced back to a feudal system, in which land was the sole compass of wealth, and in which the property rights were not granted to anybody but the king. Gradually, the property rights came to include the nobility, to eventually include the entire population which afforded to purchase the properties. From Great Britain, these values were transferred through colonization to the U.S., Australia, New Zealand and Canada to set the basis of their own real estate sectors (World Wide Legal Information Alliance, 2010).

Today, the British real estate market is characterized as one of the most developed markets in the world. It can be simply divided into residential market and commercial market. This current endeavor focuses on the residential sector, in which the main goods and services are represented by properties, mortgages and financial services. There are also several adjacent products and services, such as legal services upon purchase and/or rental, construction services, furnishing products or electronics products. The real estate sector represents an engine for economic development and this role explains the fall of the entire national economy, as the chain reaction set from the real estate sector.

The peak of the highest prices for real estate properties was achieved during the 1980s decade, and it is due to rapid economic development and an incremental access to financial resources. Additionally, in this context, the construction industry was delivering an abundance of housing units -- at higher qualities than before -- and the offer was increased. Furthermore, it is noteworthy to mention that the development of the real estate sector was also characterized by the newly implemented council housing, or a process by which people in need of housing could solicit it from the public institutions. The buildings were often of an inferior quality and the renting process was rigid and tedious. The system is maintained through today and in 2005, it was estimated that 20 per cent of all housing units in the country were under the property of local councils or housing associations (Word IQ, 2010).

The end of the 1980s decade and the first half of the 1990s decade were characterized by decreasing prices on the residential properties and this was the result of an economic crisis. The international recession generates socio-economic difficulties for the British population, who became unable to pay their mortgages. As a result, the period witnessed numerous repossessions by banks (Word IQ, 2010).

In terms of occupation rate, in 1992, it was estimated that out of the total of 23 million housing units, 66.3 per cent were occupied by their owners, with the remaining 33.7 per cent (7,751,000 housing units) being occupied by renters. The funds to make purchases were retrieved from a handful of financial agents, who dominated the market, but investments from institutions were uncommon. The trend was that of owning the property, rather than renting it and this perception of residential units was revealed at both social as well as economic levels. Julian Roche (1995) explains:

"Institutions do not invest in UK residential property for several historical reasons, mainly concerned with the high level of home ownership and the low status associated with renting: private landlords, whether corporate of individual have never had a good press in the UK since Rachman in the 1950s and institutions do not want anything other than high grade tenants" (Roche, 1995, p.9).

By 1996, the retail prices for the residential properties were met with significant increases, measured at rates as high as 20 per cent per annum. By 2005 however, the prices gained more balance and remained stable. In some cases even, they registered decreases. At that time, the residential housing stock represented over 22 million units, and it was estimated that 134,000 of the houses had been newly built.

An intriguing element was constituted by the fact that the growth in prices was uneven. In this order of ideas, while in London prices remain rather stable, massive increases were observed in the northern part of the United Kingdom, and in Scotland as well. In these regions, the majority of the purchases were closed by second home owners, and often with renting purposes; they came to compete with locals, drove up the prices of the real estate properties… [END OF PREVIEW] . . . READ MORE

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