The author wishes to take this opportunity to acknowledge the invaluable assistance and support of the author's Supervisor, without whose time, consideration, expertise and advice this present work would not have been possible.
The author further wishes to extend heartfelt thanks and gratitude to all members of the teaching staff; particular inspiration has been gained throughout what has been a challenging and fascinating course from the lecturers who have consistently delivered a wide variety of key concepts, analysis, data and argument that have provided an extremely valuable learning experience.
The support of my family has been sincerely appreciated, giving the author emotional support through a long and involved piece of work, the results of which are presented in this document.
Perhaps more light - heartedly the author also thanks both friends within and outside this educational institution for their time and occasionally humorous remarks, which has sometimes enabled the author to gain more perspective whilst wrestling with particular issues that have arisen during the context of the research, preparation and presentation of this Dissertation.
Colleagues at this excellent educational institution have also from time to time offered suggestions, which have provided the author with alternative approaches and argument to consider.
The author owes a great deal to the unselfish nature of the assistance provided by all those within this sector for their valuable co – operation.
Finally, the author wishes to thank all staff for running this institution so efficiently yet always in a pleasant, friendly and helpful manner.
The author will be conducting an in depth study of property prices in the housing market during the course of the recession, often referred to as the “credit crunch”. Furthermore the author will examine, during the course of this paper the possible explanatory hypotheses accounting for those changes that have occurred, if any did take place. Various influences will be examined in order to define and/or partially account for any changes to property prices during the course of the recessionary period of time.
Whilst correlations between variables may be established during the course of this paper, the author will argue that there is another mechanism that must be addressed in order to gain a satisfactory understanding of just how economic circumstances such as recessions may effect the property market of the United Kingdom.
This is a mechanism postulated by one of the world's most successful living investors, whose theory is, in this paper, adopted to explain market phenomenon of a different variety to those which it was originally used to interpret.
Choice of Research Project
The author, at this specific juncture will explain the reasons behind this choice of subject matter for this research paper; in order to do so a broad picture of cultural and socio economic factors will be provided, by way of some broad brush strokes; this is because environmental factors have played a significant part in choosing this research project, and also helps us to gain some understanding of what exactly has been going on in the property market particularly over the last fifteen or twenty years.
The author was inspired to choose this particular area for research for many reasons, the principal considerations the importance from a cultural point of view of the housing market in Britain; this cultural attitude can be summed up in the old phrase “an Englishman' home is his castle”. Whilst few “homes” today would qualify as “castles” this catch phrase still summarizes an attitude that is well represented amongst the British population; the importance of owning your own home. This attitude towards home ownership can be seen in the media, in many of it's forms. Newspapers and television regularly feature the property market including the latest details over property price inflation, or deflation as the case may be. Even “down market” red top papers frequently quote some of the latest statistical information e.g. from the Land Registry or the Council for Mortgage Lenders. Television programs often appear on the television schedules concerning how to move house, how to improve your house, how to make money from buying and selling houses, how to sell your home in Britain and buy a property in another country. Many presenters of these types of television programs have become famous purely on the basis of their apparent expertise relating to the property market in Great Britain, and their ability to present television programs on this particular subject. Perhaps the most famous of all of the television program presenters which focus on the subject of property is Sarah Beeny, who appears to largely specialize in the subject area of how to make comparatively large amounts of money from the purchase and sale of property, usually featuring one or more buyers of a property who decide to either renovate or “develop” a property, in other words “adding value”. Another popular program is that which is called “Homes Under the Hammer”, a program hosted by two presenters, who take the audience through the process of buying a house or flat or something similar, usually with a format involving inspecting an auction property, filming at the auction, and then liaising with the new owner as to clarify what their plans are for their acquisition, and then following it up some time later with another visit, such that an assessment can be made of any progress with regard to renovating the property, or whether they have rented the property out to tenants, and if so, for how much, or whether they have sold it on or intend to sell it on.
This leads the author onto the second reason for choosing this as my favored topic for this paper: personal interest. It is indeed a privilege to study in detail a topic which has continually fascinated me, and that the author has had an intense with regard to for some years.
A third reason for this choice of subject matter again relates to cultural factors, only in this case socio – economic factors. The Thatcher Governments heralded a tight monetary policy which was introduced to combat inflation through the use of fiscal measures e.g. interest rates. Inflation had been comparatively high especially after the oil price shock of the nineteen seventies, wage cost inflation (which was widespread throughout Great Britain especially during the late 1970's). The recession that occurred was severe, especially for those who lost their jobs during the economic contraction, and, indeed for those seeking to enter the jobs market (conditions not unlike those prevailing today). Whilst Norman Tebbit M.P., a senior figure in the Thatcher administration, and also a senior figure within the Conservative Party advised the population that instead of moaning about their being no jobs (or being made unemployed) that they “get on their bikes” (which is what he claimed his father had done to find work. Mrs Thatcher, the Prime Minister, in slight contrast promoted a policy of self-employment. Mrs Thatcher encouraged a policy of entrepreneurship, advising all who would listen and take heed of her message to set up their own business. Similarly, the Blair years in particular seemed to herald an era when people did not just seek to set up a business for an income stream, but by transforming the economy the new entrepreneurs concentrated on renovating and developing property with a view to either making profits through the sale of the assets, or through generating a stream of income from the property or properties owned via the rental market but in addition aimed to make profits through capital appreciation due to the higher prices associated with the higher prices that could be gained by selling in what, at that time often seemed to be a property market which had a one way sign on it, that sign reading going up (only). Against the background of what was still a fairly high level of unemployment (historically speaking) and crises affecting pensions (e.g. the Equitable Life collapse and the losses suffered by it's customers who had invested in pensions) the purchase of a property for residential usage frequently appeared to be the ideal solution, with the attendant rental income streams and what appeared to be guaranteed asset price inflation. Whilst a successful business started up by someone seeking an income may provide some income, survival and growth of the small businesses encouraged by then Prime Minister Margaret Thatcher were valuable contributors to growth in both income and if, as many new businesses were, it was a “start up” situation, took a while to acquire value as an asset. Whereas many new businesses go “bust” (i.e. into liquidation, or bankruptcy within the first three years) the purchase of property to satisfy needs for both an income and accumulated capital value, and represented the purchase for many people of an asset from the beginning; an asset built literally from “bricks and mortar”, something tangible. Anyone buying in the year 2001 in Great Britain would often be aware that housing prices nationwide had shown considerable rapid growth for five years, longer than most new start up businesses survive, and it was seen as a conservative investment.
Purpose of the Paper and Research Project
The purpose of this research paper and resultant paper is to examine salient issues arising from the recession, including any link between the recession itself and property prices in the United Kingdom. This project will review whether or not there are correlations between variables that may explain changes, if any to the United Kingdom's housing market, and seek to explain any movements in the housing prices.
Of great help in the context of reviewing appropriate methodologies was Bryman (2008) and the exemplary account that he provides of the available options for pursuing a research project, which was in addition to Saunders book on Business Research Methodologies.
Two specific methodologies were considered during this Project: primary and secondary research.
Primary Research is essentially data gathered from direct enquiries, such as using questionnaires and interviews to question relevant people within an organization or connected to an industry, whereas secondary research is devoted to the study of relevant sources of material which are primarily available through books, newspapers, magazines, T.V. programmes, radio transmissions and via any valid form of media.
One of the problems with gathering information from first hand sources is to gain access to people who can help provide the relevant data. In some examples of primary research being conducted, there is a major problem with inertia, even if the researcher identifies enough relevant people to provide a valid sample, or provide enough expertise from the people approached, it is often the case that those who are able to help who no interest in helping. A classic example would be when researching a company when the researcher does not have any personal contacts within that company, why should anyone respond to a postal or e-mailed questionnaire from a different number of people.
Another issue that militates in some circumstances against the use of primary research as a methodology for a research project is that if for example a Case Study is being conducted into the problems exhibited by a company, then it is often against the employees' perceived interests to either admit that a problem exists at all, and even if they do, they may often be inclined not to admit to the severity of the problem, as it may jeopardize their employment.
Some of the issues to be considered when embarking upon primary research are issues relating to ethics; for example, will there be any problems with regard to confidentiality, or, to take another example, would there be any issues presented by the primary research methodology that may involve, no matter to how small a degree, the deceipt of the persons participating.
As many people involved with organizations that may be able to assist in compiling primary research are suspicious when being approached for information about opinions and problems within that organization or within the industry as a whole it is not always a successful strategy simply to assure them of complete confidentiality.
The author therefore decided, especially in view of a lack of personal contacts within the U.K. housing industry to focus on secondary research as being by far the most likely avenue to produce valid results.
The author will discuss the contribution of secondary research in the following section (Literature Review).
The author undertook a wide ranging review of sources available that concerned the issues specified in the research topic.
As will become clear from the actual Introduction (below) the author finds this a most stimulating topic, and was fascinated long before choosing this project by this type of material and the issues presented.
Certain organizations in particular stand out as those who have provided a great deal of information as well as food for thought; these include the Council for Mortgage Lenders, the Halifax and the Nationwide, as well as the government itself e.g. the Land Registry and the Office for National Statistics.
In addition to researching internet links, the author found that supplementing this type of research there was a wealth of information applicable from the field of investment in financial instruments, primarily that provided by some of our most successful investment commentators including George Soros, founder and chief executive of the Quantum Fund. Trying to seek a firm explanation of a causal nature to account for what the International Monetary Fund defined as “unexplainable” rises in U.K. housing prices was often frustrating and at all times challenging.
A recession may be defined as a standard of economic performance exhibited when there are two successive quarters of negative growth.
Recession and the UK Housing Market
“Housing Slump Will Help Push UK into Recession Next Year, Warns IMF” was the less than optimistic headline found in an article in the Guardian in October 2008.
The International Monetary Fund is a well respected body dealing with countries on a global basis, often acting as the lender of last resort for many governments who have run out of money, and are often facing crisis.
The International Monetary Fund reviewed the United Kingdom economy against a backdrop of “slashing” (The Guardian) the growth forecast for 2009 from a projected 1.7% of positive growth, to a negative growth rate of minus 0.1%.
Circumstances relating to this collapse in confidence in the forecasts for the United Kingdom's economy were made due to the collapse of the banking sector, and the desire of the British Government to bail out the banks involved in the credit crunch.
The first run on a bank for decades in the United Kingdom exemplified the distress of depositors in the Northern Rock who queued outside its branches, eagerly waiting to take their money out, if possible. Equally, whilst many hoped that they would be able to make a withdrawal, was the panic felt by those with major percentages of their overall personal wealth invested in the Northern Rock plc.
The Royal Bank of Scotland and Lloyds T.S.B. required financial assistance from the Government of the United Kingdom, which duly obliged by funding “bail outs” which were effective in keeping these high street names in business.
The International Monetary Fund had produced a report which made for foreboding reading. Many criticize the International Monetary Fund because of it's policies, for example because it has a reputation for imposing tough conditions on countries asking for loans, such that what are often poor countries with largely impoverished populations become even poorer by the course or courses of action taken by it's government in order for that country to comply with the terms and conditions imposed by the International Monetary Fund as the conditions for financial assistance. Britain had previously requested economic assistance from the International Monetary decades previously in the 1970's, when the then Labour Government experienced such extreme problems financially straining problems that it was at the point of requiring a “bail out”. The decade preceding 2008 had been viewed positively by the International Monetary Fund, often praising the Government of the U.K. for it's management of the economy.
Having achieved growth of 3% in 2007, the report expected the United Kingdom's growth to falter and slow down to only 1% in 2008 and then weaken even further during the course of 2009, such weakening growth being forecasted did little to boost the confidence of the participants in the economy of the United Kingdom.
A regularly occurring effect of economic contraction is growth in unemployment, which the International Monetary Fund forecasted to rise to 6% during 2009.
The Northern Rock had played a key part in the housing market, being an exceptionally aggressive lender. Whilst most banks had “status” considerations to relate to the borrower, assessing the applicant for a mortgage according to criteria including; what assets does this applicant have? What income does this applicant have? Why does he/she/they wish to borrow this money?
The report revised, in a downward direction, their predictions for the economy of the United Kingdom, advising that of the G7 industrialized nations, the U.K. would be the worst performing of all apart from Italy, which was expected to experience an economic contraction of 0.2%. This may be compared with Germany, whose economy was forecaster to stagnate completely during 2009, and the economies of France (predicted to increase by just 0.2%), and the United States (forecast to rise by 0.1%). The largest increase of the G7 industrialized nations was expected to be Canada, which was expected to rise by 1.2%, especially supported by it's production of raw materials, followed by Japan, calculations indicating a 0.5% rise.
Tax receipts would crumble, they said, leaving the U.K. with a 4.4% deficit in the United Kingdom's public finances.
There were some notes of optimism in so far as the I.M.F. believed that the global economy as a whole would grow by a total of approximately 3% because it would have China, India and Africa to counter balance the effects of declines in the Western economies. The three areas specified here were, in descending order forecast to grow by 9% (China), 7% from India and a further 6% boost to the global economic picture contributed by Africa.
Robert Zoellick, who was President of the World Bank at the time, further re enforced these gloomy sentiments, and is on record as being interviewed and forecasting that with an extra 44 million people likely to go without proper nourishment the world wide total of mal nourished people would be over nine and a half billion.
The I.M.F. and the U.K.
The housing market in the United Kingdom was cited by the International Monetary Fund as a major concern due to it's fragility. Three countries, Britain, Australia and Ireland had exceptionally large increases in property prices which, to quote the I.M.F., were “unexplained and could not be accounted for due to “fundamentals” (ibid) (i.e. basic forces that could normally determine rises in house prices); examples of prime drivers of the housing market were increased population and higher incomes.
Oliver Blanchard at the I.M.F. noted that “The most severe downswings in housing markets have occurred in Spain, Ireland and the United Kingdom” (ibid.). He continued by saying that the moves to cut interest rates and finance the banks would indeed prove helpful before cautioning that (ibid) “There will be tough times ahead” and went on to say (ibid) “The re-establishment of trust, or more formally, the decline in counter party risk within the financial system will take time. During that time, credit to the ultimate borrowers will be limited and expensive”.
The U.K. Housing Market From 2007 to 2011
A brief picture of the state of the U.K.'s housing market can be found on the BBC (British Broadcasting Corporation) website (www.bbc.co.uk/news/1062450).
“The average price of a home in the UK peaked in late 2007, then plunged rapidly in 2008 before recovering in 2009 and then reaching a plateau in 2010.
Prices dipped towards the end of 2010, which - in turn - caused rental prices to increase.
The housing market was the first area to be affected by the credit crunch as banks curtailed their lending, making it more difficult for buyers to get a mortgage.”
The BBC (ibid) goes on to state that banks and institutions generally ld be disinclined to grant mortgages and that this would be the reason for either declines in housing prices or stagnation in the housing market. The importance of the first time buyer is highlighted and if first time buyers are excluded from the market then the central impetus that drives property house prices in an upward direction would be lost.
The BBC further goes on to say that;
“The housing market was the first area to be affected by the credit crunch as banks curtailed their lending making it more difficult for buyers to get a mortgage.
This continued into 2010 and was widely quoted as the key reason for property values filing to pick up as demand has been low especially amongst first time buyers.”
Other headlines on the BBC web site continue with a doom laden scenario; headlines included “Households face falling income” and “Growth in UK manufacturing slows”; from these two foreboding headlines it can be seen that the housing market would or could be effected in so far as if the income of families falls they may be less likely to be able to service a mortgage, and if growth in UK manufacturing slows there may be more unemployment because fewer jobs will be created in the manufacturing sector.
An accompanying graph from the Government's Land Registry, which processes and stores information on house sales and mortgages, shows the year on year % change in house prices across Great Britain, showing two very small areas falling by about 10 – 15% over the year to the end of the first quarter of 2010, the majority of Scotland outside of the major cities (Glasgow and Edinburgh) did house prices stay relatively stable with either no increases, or small increases of up to 5%. Large swathes of northern England, roughly from Leeds, Manchester and Liverpool northwards experienced rises in house prices up around 10% - 15%, but from the Midlands and further south large parts covering the majority of the southern parts of the country are judged to have gained by 30% to 60%.
House Prices; 1999 – 2010
The Halifax/Nationwide has provided data relating to UK house prices over the period of time from the beginning of 1999 through to the end of 2010.
Starting with an average house price of a little over £50,000 at the beginning of 1999 it was not until the beginning of 2002 that housing prices had increased to an average of £100,000 and then they continued a steady upward climb until the average house price reached £150,000 by the beginning of 2004.
By the middle of 2007 both financial institutions agree that housing prices had peaked at an average touching or close to £200,000. Correlated with the “credit crunch” which included the collapse of Lehman Brothers and AIG seeking the funding of the U.S. taxpayer, U.K. house prices dipped rapidly and within one and a half years i.e. by the beginning of 2009 the U.K. was back to having an average house price of £150 000 and then recover a little in an upward trajectory by 2010.
What Is GDP? GDP Defined
“GDP” stands for “Gross Domestic Product” and is arguably one of the most if not the most important statistic for any economy as it seeks to measure the state of the economy at one particular time with one number.
GDP is usually measured for each quarter and to determine whether the economy has expanded over any given period of time one simply takes the GDP figures for the appropriate period of time and sees whether they have gone up or down; if the figure has increased over the chosen period of time then the economy has expanded, but if the figure at the end of the period to be measured is lower then the economy has contracted. However, it is normal to temper these figures and revise them in such a way that a distinction is reached between “nominal” and “real” figures; the difference is that inflation especially since the end of the Second World War, has become embedded in the British economy, indeed is embedded in the economies of countries including the Westernized economies, and effects India and China and Brazil.
One of the world's largest and traditionally least inflationary economies in the world is Germany, but even Germany experiences inflation.
Inflation is not necessary for an economy to exist and there are also variants of inflation such as “stagflation” where the economy itself simply stagnates while inflation continues, and, for example, deflation, where prices go down.
GDP or gross domestic product can be inflation adjusted to strip out the effects of inflation on the statistic known as GDP such that instead of a nominal GDP we have a real comparison of economic figures, without the distortion of inflation.
Updates on Housing Prices
The Daily Telegraph, in an article published 2.9.2010, reported recent trends in the U.K. housing market.
In the three months to August 2010, the Telegraph reported that the quarter on quarter growth according to the Nationwide had fallen to zero; as this is a generally regarded “smoothing” indicator” this is bad news for existing property owners, but good news for first time buyers. The three month period this comment relates to ended in August 2010 (by Philip Aldrick 12:28PM BST 02 Sep 2010).
Separate figures on house prices from Nationwide and the construction industry have raised fresh fears that a weakening housing market could halt the recovery.
Construction has picked up strongly this year, accounting for the largest proportion of economic growth. The Markit / CIPS construction PMI survey found the sector grew far more slowly in August than it had done in the preceding July – falling short of many economists expectations.
The fall was primarily blamed upon a “marked slowdown in the residential sector”, where “much of the recent sector growth has come from”, said David Noble, CIPS chief executive.
Housebuilders have been increasing their build in response to rising house prices but, for the second month running, Nationwide reported that house prices fell – suggesting that the decline is becoming a trend, which will worry many existing hose owners.
House prices fell by 0.9pc in August, Nationwide reported, following a 0.5pc slide in July. It is the first time house prices have dropped for two consecutive months since February 2009. The data will add to rising expectations that the housing market is heading for a double dip. Many economists now expect prices to continue falling for at least the near future.
“The housing sector was the first to return to growth last year and its sudden weakening will heighten fears that the housing market is entering a period of stagnation, if not outright contraction,” said Simon Hayes, UK economist at Barclays. (Daily Telegraph, ibid.).
The housing market often fuels consumer spending which in turn helps the retailers, the travel, tourism and leisure sectors; when house owners believe they are relatively “well off” and feel confident about spending money, and when they have money to spend e.g. by borrowing against the value of their housing assets it is easy to observe the connection between the house owner and the economy in general.
A weak housing market tends to effect the economy in both consumer spending, where it traditionally strikes, as well as the construction sector, which has so far led the recovery. However, the PMI figures showed that the construction industry is still growing, however this growth is at a reduced pace.
PMI fell from 54.1 to 52.1, more than six points below the heights achieved in May. Any reading above 50 constitutes growth. Many economists' arrived at a consensus forecast of 53.2. The house-building index, a uinit in the construction PMI, fell to a 10-month low in August, suggesting it is being affected by the weakening price outlook.
Official data last month showed British construction output jumped 8.5pc between April and June, the best performance since as long ago as1982, but the more forward-looking PMI survey suggest this pace of growth will not be maintained.
Whilst UK GDP for the quarter rose at 1.2pc – the fastest for the last nine years – led by the strong construction performance. Construction activity accounts for just over 6 percent of Britain's national output. “ http://zincip.biz/2010/09/page/12/
Rather pessimistically, Mr Noble summarized the state of things as follows; “Those who are looking for signs of a slowdown will find plenty to worry about in this month's construction PMI,”. http://www.insidehousing.co.uk/news/development/construction-activity-slowed-in-august/6511466.article
“The most disturbing is the marked slowdown in the residential sector as this is where much of the recent sector growth has come from. The slight increase in public sector activity disguises continuing uncertainty about the scale of spending cuts which we have yet to experience.”
The survey showed that civil engineering, where public sector spending is typically focused, registered the strongest growth, although this could be hit by a deficit crackdown.
Mr Hayes said: “On the face of it, this sectoral configuration does not bode well for future construction output, in our view. Cuts in public investment seem likely to drive the civil engineering index lower over the coming months and we see few reasons to be upbeat about housing market prospects.”
Building contractors are more confident the gradually improving economic outlook will boost workloads, although the survey also showed new order growth slowing for the third month in a row.
Mr Noble added: “For the more optimistic amongst us, however, it still looks like we are entering a period of low growth rather than another recession but the jury's still out. Though this month's figures are disappointing, we should remember that overall the sector is still growing.
“The housing market is key to recovery in the longer term but now appears to be in a transition phase. There is still a job to be done in balancing stricter criteria for mortgage lending with demand for new homes, if new projects are to get off the ground and reverse the slump in the residential sub-sector.”
The Reliability of Statistics
Gross Domestic Product is measured by the Government's Office for National Statistics. Measures of GDP itself may vary according to the measure used, and raises issues for the accuracy of this figure, and whether GDP figures between national economies are truly comparable. Measures of GDP include the Income Measure, the Output Measure and the Expenditure Measure.
A similar comment may be made about inflation statistics, which depend upon what items are measured; for example CPI (Consumer Price Inflation) and RPI (Retail Price Inflation) differ in the measures of inflation that we receive. When then Treasurer Gordon Brown chose to supposedly make a concession towards joining the euro by adopting the standard European measure of inflation i.e. the CPI, one of the fortunate effects against a background of generally rising prices and a Bank of England mandated in a comparable way to that in which the old Deutschebank was made responsible for the control of inflation as it's ultimate objective was that Gordon Brown, at a stroke reduced the rate of inflation.
Measuring inflation depends often upon the accuracy of employees of the Government visiting e.g. shops to compare a “basket of goods” and their prices from one survey to the next. But, how does anyone decide which products and / or services to include in the “basket” and how representative is the “basket” and how do we judge what is representative? And, for whom is it representative; does a “basket” of goods and or services that includes bread provide an accurate and representative inflation figure for all those thousands of people who have food intolerances related to bread and / or it's ingredients.
As noted above, there are three different ways of measuring Gross Domestic Product, and in theory at least they should all agree. The output measure is based on surveying tens of thousands of U.K. firms from all different sectors of the British economy, including manufacturing and agriculture, services and government activity. The selection of organizations surveyed includes 6,000 manufacturing companies, 5,000 retailers, 10,000 companies involved in construction, as well as 25,000 service sector companies. The “Expenditure Measure” includes the equation of exports minus imports (usually negative for Britain), and what households spend and what is spent by the Government; all items of expenditure are measured whether it be capital investment or for consumption. The “Income Measure” in contrast to the “Expenditure Measure” purports to measure the wages and the profits generated during the period being measured.
Office of National Statistics (ONS) Measurements of Gross Domestic Product (GDP) From 1990 Until 2011 (Latest Figures Available)
Whilst countries such as China claim annual GDP growth rates of up to 12%, and have seldom claimed less than 8% during the last few years, Great Britain has not apparently exceeded more than 1.5% GDP growth quarter on previous quarter. ASEAN countries generally state GDP growth rates in the region of 4% plus per annum. Whilst “GDP” may sound as though it would be measured correctly and in the same manner (i.e. using the same Methodology) throughout the world, and therefore GDP figures should be able to be compared easily, as noted above, the efficiency of data gathering may be questioned and the efficiency of collecting data may vary from country to country; whilst less democratically inclined government's may have more freedom (due to less transparency and accountability) to alter their real figures if they wish to, therefore for political purposes, particularly with the growth of the “Arab Spring” over the last few months, it may be that one party states may try to encourage a “feel good” factor amongst it's population through encouraging people to believe that their economy is prospering because of the policies implemented by their governments.
Since 1990, Britain has been subject to at least one quarter's decline in GDP (two quarters which are consecutive of negative GDP growth is the generally accepted definition of a “recession”), during 1990, subsequently experiencing continual GDP growth until 2009.
The decline in GDP according to the ONS (Office of National Statistics) was up to 1.2% in 1990, whilst the 2009 declines measured up to 2.6%. Whilst the economy recovered from 2010 there was a further fall later in 2010 of 0.5%.
How Did the Credit Crunch Influence Housing Prices in the U.K.?
As earlier noted, British people tend to absorb a culture of “an Englishman's home is his castle” and that the property owning as opposed to a renting culture is deeply ingrained within the British psyche. Also (noted above) is that what Napoleon said, that the British were a nation of small shopkeepers had been replaced by a culture of the British becoming a nation of landlords.
To understand exactly how the credit crunch effected the British housing market let us consider it's origins.
The market for mortgages rapidly expanded during the last decade, involving increasing numbers of people acquiring mortgages.
Markets often operate within a life cycle format; as the U.S. market grew to maturity so the number of “prime” borrowers became satisfied, such that the supply of new customers was curtailed.
In order to “keep the ball rolling” it was essential to find new customers; and who else was there but those who aspired to property ownership, but did not traditionally have either the means or the wealth to finance repayments or large deposits, respectively. This became known as the “sub prime market”.
Thus a widespread practice of mortgage lenders was to grant mortgages known as “NINJA” mortgages, NINJA standing for “No Income No Assets” and also implying a certain element of either wise or foolhardy bravery or foolishness on behalf of the lender as they were selling mortgages for a very high percentage of the value of the property purchased to people with no deposits and insufficient means to actually maintain repayments.
Keen to realize gains and / or dispose of potential liabilities banks parceled up these NINJA mortgages and sold them on to other institutions, who were no doubt impressed by the high credit ratings conferred on these packages of NINJA mortgages by the likes of Standard and Poor's. The complexity of these products was beyond the understanding of many of the managers who managed the traders who sold these “AAA” rated investments.
Whilst sellers made money from buyers of these parcels of essentially worthless debt which were often packaged in such a way that no one understood what they were buying anyway, everyone was happy; however, increasing numbers of NINJAs found themselves unable to pay, and so the whole edifice began to crumble with a vengeance.
As assets were found to be worthless, so banks increasingly felt reluctant to lend to each other, partially because of the need to comply with capital adequacy ratios which they were obliged to meet under the Basel agreements.
With liquidity drying up, banks including Lehman's and insurance giants such as AIG went cap in hand to the American government. In Britain, Northern Rock was a prime example of a British financial institution that was also overly keen to grant it's own type of Ninja mortgages, but in Britain they were called “Non Status” mortgages.
Most of Britain's major banks found themselves in a predicament; to survive extra funding was required, and, at such short notice, who better to ask than the British government (the exception being Barclays who found another avenue to support them through their times of need).
Banks on both sides of the Atlantic found themselves unable or unwilling to take on counter party risk, and there were increasingly smaller funds available for lending to the end user of the funds, whether that end user was a company seeking working capital or money for investment, or a person / people seeking a mortgage. Terms and conditions of lending became increasingly more stringent.
Whilst the Bank of England embarked upon a concerted policy of historically low interest rates held at 0.5%, and embarked upon billions of pounds worth of Quantitative Easing, the would be mortgagee was unable to borrow at all from many institutions without a 40% deposit, and even then the lender charged what may be considered to be a generous mark up premium for the risk that they were taking.
The Search For An Explanatory Hypothesis
As can be seen from the above explanation of the causes and effects of the “credit crunch”, generous loans e.g. of the non status variety of which Northern Rock was a prime exponent, became a thing of the past despite the Bank of England's best efforts. With sterling bouncing around historic lows against the euro and the U.S. dollar, the apetite for even the mathematically skilled risk taker for non sterling mortgages was cut off.
The author has clearly demonstrated that over a considerable period of time i.e. from 1999 UK average house prices have varied dramatically, peaking in 2007.
The housing market is a “market” bringing buyers and sellers together to engage in exchange, usually for monetary consideration(s). Markets are capable of being segmented by various factors known as variables, which are usually defined as geographical, behavioral, psycho - graphic and demographic.
The author has clearly demonstrated that there have been rather wild variations in house price changes during an annual period, with regional i.e. geographic variations varying from minus 15% to plus 60% over a twelve month period (based upon average house prices according to the Land Registry.
The author has also clearly shown that the International Monetary Fund regards the property price explosion in Britain, or the asset price inflation relating to that particular class of assets, as unexplainable, and certainly not justifiable on “fundamentals” i.e. through a fundamental analysis of for example increased demand for housing due to population growth, or increased supply of money through proportionately rising incomes.
It may therefore be stated that, if the above statements are correct, there is no link between fundamental factors that normally fuel house price acceleration, and that there is no explanation.
The author will continue to look for a satisfactory hypothesis or hypotheses that may succeed in explaining the growth in housing asset values.
Does Growth / Decline In GDP Explain House Pricing Variations?
Growth in housing prices, although the International Monetary Fund has stated in one of it's official reports that such growth cannot be explained.
It is clear from the analysis of growth and decline in housing prices and the growth and decline of Gross Domestic Product that as data provided by the Office of National Statistics on GDP and the Halifax / Nationwide data on average housing prices are presented on a quarterly basis, that comparisons can easily be made.
It should be noted at this point that the data from the Halifax and the Nationwide do not agree precisely, with the Nationwide either matching or being below the figures quoted by the Halifax. As their figures are based upon mortgage information, a reasonable explanation is that they have slightly different geographical market segmentation; given that each financial institution deals with slightly different geographical areas, mortgage approvals and the amounts approved may differ.
Comparing GDP and the average house price surveys of the Halifax / Nationwide, it is clear that there is a broad co incidence of the onset of deteriorating GDP and average housing prices.
It is also clear that the recessionary period of the early 1990'2 also co incided with
the slump in property values which occurred then.
Causality/GDP and House Price Averages
However, the question then arises; what is the mechanism by which a change in housing asset price inflation is caused by the decline in GDP? As, for example construction constitutes approximately 6% of the economy of the United Kingdom, it is unlikely that the causal effect would be vice versa i.e. from GDP to the housing market, initially at least.
As the decline in house prices roughly occurs with the decline in GDP, can we suggest that decline in GDP causes the slump in housing asset values?
It has already been noted that the decline occurred due to the credit crunch, and the lack of availability of mortgage finance, particularly for first time buyers who tend to underpin and fuel the market (without the first time buyer, those already on the first step of the housing ladder are unable to sell their home to a new entrant to the market, and therefore, unless cash rich, will be unable to move to a new and more expensive property.)
Unemployment and Housing Prices
It is natural to expect a correlation statistically between declining GDP and rising unemployment; traditionally this has always been the case and is easy to understand because as economic activity reduces, so the number of jobs required to create that output in both manufacturing and services is reduced.
Postulating An Explanatory Hypothesis
It has been stated that the housing market is simply a mechanism that brings buyers and sellers together, and they make exchanges of property, usually for monetary compensation.
Smith (1968, p. 53) states simply that markets go up when there are more buyers than sellers, and that markets go down when there are more sellers than buyers.
It may be assumed then that the housing market and average house prices declined due to a surplus of sellers and a lack of buyers.
It would not be difficult to imagine that, without new buyers coming on stream, especially the first time buyers, that the lack of demand would effect not only the housing market, but also for example, the retail sector; everyone from IKEA selling kitchen units to Miss Selfridge selling clothes will be hit badly by the decline of spending power; the wealthy home owner is able to borrow confidently against his / her/ their rapidly increasing housing asset. Equally, industries such as hotel, leisure and tourism will be negatively impacted as home owners who are “tightening their belts” reign in their spending.
Soros (1987) proposes a theory to explain market movements; whilst primarily engaged in trading commodities e.g. gold and currencies e.g. deutschemarks and yen, as well as famously or infamously the pound within the European Exchange Rate Mechanism, Soros makes an interesting case throughout his book “The Alchemy of Finance” to uphold the belief that the numbers of buyers and sellers present within a market place and the trading they conduct is not a matter of fundamentals or real world events, but consists of a Hegelian or Marxist dialectic between events in the real world and the perceptions of the participants in the market of these real world events ((p. 41 – 43).
This mechanism of market participants perceptions could help us to understand and explain house price movements if taken in conjunction with facts about the real world.
It may be assumed that, due to the “AIG effect” or “credit crunch” that many would be or aspiring entrants into the housing market or aspirants to trade within the property market were essentially excluded due to Banks (who, admittedly are also market participants) declining to lend without the caveat of either large deposits or high (comparatively) interest rates.
Of those who are not excluded a great deal depends upon their perception f what is occurring in the market place, and depending upon their perceptions either they want ot participate in the market or they are put off. Even if they wish to participate it may be that other circumstances influence their perceptions in such a way as to put them off trading, thereby creating another factor decreasing demand for the stock of housing assets offered by the prospective sellers.
During the course of what has been a wide ranging paper a number of likely variables including Gross Domestic Product (GDP) and Unemployment have been reviewed with the conclusion being that declines in GDP is likely to occur and cause unemployment to rise (as per the prediction of the I.M.F.). Lack of income and in some cases lack of opportunity to acquire wealth militate against housing asset prices increasing.
The author has also explained the precise causes and sequences of events embarked upon through granting both “non – status” and NINJA mortgages, highlighting their consequences and their role in causing the downfall of a system that readily provided loans to every aspiring home owner, desite deposits or income requirements, and how counter party risk aversion claimed the life of the lending market within the U.K.
In conjunction to these factual mechanisms which prevented buyers from meeting and trading with sellers, an existential or psychological explanation has also been given, drawing upon the work of legendary investor George Soros as well as philosopher Hegel and political philosopher Karl Marx.
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