British Builders Briefly Describe the Problems Facing Essay

Excerpt from Essay :

British Builders

Briefly describe the problems facing the house building industry in Britain

The boom of the housing sector had come crashing with the depression of 2008-2009 when the whole globe tottered under economic instability. The problems stem from the market reactions and the general condition of the industry during the depression. The economy has not yet recovered and the problems that were created in the 2009 scenario continue even now. In 2009, many problems were identified and predicted for the house building sector both in the UK and for the Northern Ireland construction firms from 2010 because of the recession and subsequently many firms were forced ironically to 'enter into an individual voluntary arrangement with its bank and creditors to stay afloat'. (Lynagh, 2010)

There also is the phenomenon of downsizing and as the year rolled along the recession has made the industry financially in a tight spot. Beginning 2009, the trend has been continuing. The important hit was felt in the activity of financing and mortgages. This is a feature of lending institutions and of banks and the major customers of housing depends on the financing for purchasing of homes. Home finance and credit as well as industrial credit are the back bone of investments in real estate. This leads to mortgage, which is "the practice of pledging property as security, essential in the acquisition of rights in land and improvements through borrowing, is as old and as ubiquitous as property itself." (Fisher, 1951)

Thus mortgage was defined as pledging an interest in land to a creditor such that the said creditor has title and possession or occupancy. When the debt was met the possession, and occupancy pledged would revert to the pledged. This form is unchanged today. Banks take mortgages and issue property loans that have to be repaid. The loans may be made on other pledges but the land and things may also be taken as 'additional collateral'. Mortgages are a bane in the real estate market. The mortgage brokers operating in the home mortgage and financing have been the cause of defaults and unfair fixing of the prices. He argues that though necessary these agencies are by far costly to the market. Mortgages and bank loans are burdens of mortgaged owners who are not primarily the affluent persons. Their dependence on salaries and other forms of income ought to be noted. (Lynagh, 2010)

These anomalies have caused the housing-market processes to contribute to social stratification based on the affluence thus creating new class relations cannot be completely overlooked. Thus the house-price was as important as share prices. This along with the question of affordability leads to the examination of home affordability. This is the reason why the construction industry cannot continue in a depression because the lower income levels create a barrier for the consumer to borrow and invest. For the last two years the construction firms are reeling under huge debt and customer pulling back from commitments. This has resulted in halting of new projects and even the simple contracting work has now become unprofitable. (Lynagh, 2010)

The profit downturn and decline in work have led to widespread folding up of many companies. The economic factors have led to a rise in cost. Apart from that other technical requirement has also hit the British industry. For example, environmental rules like the zero carbon emission and other numerous government policies harming and affecting the affordability and sustainability of new homes. It is projected that by 2016 the production rates would go up to two hundred and forty thousand per annum in terms of units. The attitude of the government with the 'Code for Sustainable Homes', and the stringent sustainable standards for all new homes with targets for the house building industry, with directives for production of zero carbon homes by 2016 are more burdensome. While the costs, benefits and risks of building zero carbon homes are yet unclear, there are still a lot of legal, financial and cultural issues in the construction of zero carbon homes. (Osmani; O'Reilly, 2009)

There is the issue of investments being made out of the UK because of the tax issues that is driving real estate investment out of UK. Investment overseas results in savings in tax. As can be seen, taxes can be excessive as in Britain. Thus the tax policies of other nations are an important fact that could increase the possibility of investment being made in a country that offers free trade zones and lesser tax than the parent country to investors. In the examination of this fact the Shelter Offshore Report (2009) titled "Are Offshore Tax Havens Benefiting from British Higher Rate Tax Payers' Wealth?" points out that the British government's tax policies are making citizens invest offshore from the UK. She claims that "Offshore Tax Havens benefiting from British Higher Rate Tax Payers' Wealth? In their April 2009 budget, the British government not only made it very clear that they want to tax higher earners far more, but that they want to put a cap on any tax relief that such individuals currently enjoy on any of their savings and investments too."

The taxes in UK are expected to rise to 50% with tax relief of 20% at source to pension contributions, and if person earnings above £100,000 per annum, the income tax personal allowance will be completely eliminated. And any country that offers a lesser income and other tax rates will naturally attract investments. Thus to help construction industry the tax competitiveness must be considered. While legislations increase the cost it also may increase the span for the projects and this is to be considered because projects are of long-term and like business cycles the construction also has its cycles. The long cycles in residential construction especially the single-family dwelling, being the biggest investment a family makes, has a different pattern for consumption and the difference in the pattern of investment in these buildings are cyclical. (Clark; Cohen, 1963)

The residential building is characterized by cycles, because the system does not follow the market rules of supply and demand. It must not be forgotten that there are also long cycles in residential construction. One discovery is that this cyclical fluctuation is influenced and follows the cycles in general business, and these cycles are often seen lasting from fifteen to twenty years. These cycles then are responsible to the drastic changes that have caused panic in the real state world from the middle of 2009. (Clark; Cohen, 1963) The problems that began in 2009 for the industry may thus be summed up as under:

1) The industry needs financial intervention as it has not yet recovered from the recession and thus lending institutions and banks and the major customers of housing depend on the financing for purchasing of homes 2) The state of the economy has made the homes unaffordable for a lower income level consumer to borrow and invest 3) Unviable environmental rules like the zero carbon emission and other numerous government policies have caused burdens of cost and other legal, financial and cultural issues 4) Very heavy taxation is seeing to it that the investors seek overseas avenues rather than invest at home 5) Based on the economic cycles the construction industry is also subject to cycles that also cause investment anomalies in this industry. All these are the current problems. Solutions to some of the problems exist, while others are part of the industry functions and cannot be totally wished away. (Clark; Cohen, 1963)

Question 2: Analyze the problem and gather and interpret information to identify option s to solve the problems

The major problem is the soaring prices of components and consequently the cost of the homes. Homes are no more affordable. Thus the prices of homes are the solution that one must look to in the housing sector. The prices are based on long-term issues. For example there are rights in real estate that last for long periods of time and the commitment of funds thus is also for longer periods. Thus it has important consequences in the market. Unlike other sales, the present and the possibilities of a distant future are also considerations in real estate transactions. Thus the possibility of appreciation of value in future as for example the future value of a home purchased today has a bearing on the price of the home today. It is argued that the theory advanced in the 1950s was that if prices have remained constant for some time the current buyer will not be willing to pay more at least no more than the prevailing price. But a fluctuation in the price that is rising however slight, always encourages a purchase with a premium because the seller is also aware of the future profits that the sale would bring to the buyer. (Fisher, 1951)

Thus sometimes prospecting in the real estate market will be akin to 'buy low sell high' speculation of the stock market. There is risk and hence…

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