QUESTION

2.0 Recent trends: how did we get to current situation, Deregulating banking, easy borrowing in 2000,

Toxic loans, 2008, 2007  Financial Crisis, Credit Crunch, 40% deposit on property, today (10-20%)

Analysis of Relationship, housing Price, GDP, and IR   (550) words

THIS SHOULD BE RELATED TO HOUSING MARKET

4.00 Macro

The Budget, Current situation in the UK economy,

GDP

Unemployment, the Effect of unemployment

Inflation, Balance of payment

Fiscal/Monetary Policy

Effect of the IR reduction from 5%-0.5% related to all housing

SOLUTION

1. Introduction

The financial crisis hit the global economies in 2007 and the impacts of the crisis have had deep rooted effects on economies globally. The crises have shaken the basic fundamentals of these economies. The crisis though have their origin  the US but the impact of the crisis have trickled down to other global economies as well.UK and the Eurozone have been worst hit by the crisis in 2008 and ever since have been engaged in financial remodelling to emerge from them. Another thing to be noted in the impact of the crisis is that the developed economies like US,UK, France and other Euro economies have been adversely affected on the other hand developing growth economies continue to register considerably high growth despite the impact of the crisis.

To understand the impact and implication of the crisis on the UK economy it is important to understand the origin of the crisis and their impact.

2. Origin and Impact of the Financial Crisis

2.1 Origin of the Crisis

Originated in 2007 the ‘Credit Crunch’ has had an impact on global financial as well as property markets this has led to the collapse of the international money markets globally. The decease of the subprime mortgage market in the US was the cause of the crisis. However the effects of the crisis were not apparent immediately but when the Bank of England identified the same problem originating in the English real estate market, the global impact of the situation had begun to be realised. Financial analysts have played an important role in the globalization of money and the property markets. Though the new methods of finance resulted in providing liquidity to investors on the other hand exposed the investor to a high degree of global risk. The collapse of the US residential market has resulted in creation of a global balance sheet problem.A$900 billion (out of a $9 trillion in mortgage debt) is in the sub-prime paper in global balance sheets of banks, investment houses, hedge funds and mutual funds.

(Adair et al, 2009)

2.2 Housing Market Crisis UK

After experiencing robust growth in 2007 the housing market declined from 2008 onwards.  The robust economic growth from 1999-2007 onwards can be attributed to low interest rates, high employment and constrains in the housing market. Easy mortgage availability provided by lending institutions to enhance the shares in the loan market was also partly responsible.

Source- Nationwide (www.economicshelp.org- accessed on 6/4/2012)

The robust growth can be seen from the above chart with a sharp decline faced by the market in October 2008 which can be identified as the origin of the financial crisis. The August 2007 decline in the housing prices was identified as seasonal and was ignored by most companies. The companies failed to identify the factors causing the decline in the property market which were beyond the housing market resulting in a deep crisis in the housing market. As the fallout from the crisis increased UK slipped into recession. The economic downturn was combined high lending rates as well as high rates on unemployment. The nationwide monthly Housing index shows a decline in the housing prices from £184,099 in November 2007 to £150,501 in December 2008 a decline of over 18% according to Halifax. The same factors that were responsible for the collapse in the US were same in the UK. The Collapse of sub-prime mortgage market, leaving mortgage debt of; £363.4 billion in 2007. Thus the as the crisis identified the mortgage debt also intensified leaving a serious crisis in the British housing market. To overcome the crisis banks have adopted massive financial restructuring accompanied with stringent liquidity controls to emerge out of the debt crisis.

(Adrian et al, 2009,Parkinson et al 2009).

3. Current Situation

The UK economy continues to struggle and emerge out the economic the crisis however the situation still appears to be grim in the British economy. Burdened with high debt load, high interest rates accompanied with massive rates of unemployment UK is currently battling a very grim economic situation. According to the British Parliament 2012, the British economy grew at the rate of –0.3% in the last quarter 2011 as opposed to a positive growth of 0.6% in the previous quarter. The Housing market index continues to fall the index fell from 1%in Feb 2012 to 0.1% in March 2012 a clear refection of instability predominantly existing in the housing market (www.parliament.ac.uk – accessed on 6/4/2012).

British economy’s worse than expected economic performance can largely be attributed to the high rates on unemployment rampant in the British economy. The Bank of England revelations of over private sector job cuts and the public sector job losses expected at 110,000 have dampened the UK economy. The bank of England expects an impact on lawyers, manufactures and retailer to be hit by the job losses. There are Expectations of a double dip recession as well. Most economists have argued that the pace of the recovery is considerably slow, and if the recovery continues in such a manner then only by 2014 the GDP is said to recover to its peak considering the past decade.

The government continues to bailout banks to enable them to consolidate their position the market. Further in 2011 the UK government made an additional allocation of £75 million pounds to revive the lending market these additions have continued till Feb 2012. With these monitory policy measures adopted by the Bank of England concerns over dipping growth over various quarters of 2012 and other balance of payments deficits continue to rise(www.thisismoney.uk – accessed on 6/4/2012)

4.Conclusion

Thus the impact of the financial crisis is clearly deep rooted, and the crises have also been intensified by the Eurozone. The Euro zone is the largest trade partner of Britain and with the collapse of several euro zone economies like Greece in 2011. UK is unlikely to escape from its impact. British government has also adopted austerity measures to control the fiscal deficits to initiate some sort of recovery and adopt policy measures that would protect the UK economy and enable the growth of financial sector and industry in the UK. But clearly the road to recovery is a long and challenging one.

5. References

• Adair, A, J Berry, M Haran, G Lloyd, and S McGreal . “The Global Financial Crisis: Impact on Property Markets in the UK and Ireland.” University of Ulster Real Estate Initiative Research Team 1.1 (2009): 1-65. Print.
• Parkinson, M, M Ball, N Blake, and T Key. “The Credit Crunch and Regeneration: Impact and Implications.” commiunities.gov 1.1 (2009): 1-75. Print.
• “UK heading for first double-dip recession since 1975.” www.telegraph.co.uk. N.p., 25 Jan. 2012. Web. 7 Apr. 2012. <http://www.telegraph.co.uk/finance/economics/9039653/UK-heading-for-first-double-dip-recession-since-1975.html>.
• “Parliament UK: Topics: Economic situation page.” www.parliament.uk Home page – UK Parliament. N.p., n.d. Web. 7 Apr. 2012. <http://www.parliament.uk/topics/Economic-situation.htm>.
• “Economy watch: Is Britain heading back into recession? | This is Money.” This is Money: Be your own financial adviser – predictions, advice &tips .N.p., n.d. Web. 7 Apr. 2012. <http://www.thisismoney.co.uk/money/news/article-1616085/Economy-watch-Is-Britain-heading-recession.html>.

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