While it was generally agreed that the increase in prices was due mainly to an insufficient offer as the stock house was limited, opinions have also been forwarded according to which the buy-to-let purchases have contributed to the inflation of the house prices (Property Mark).
The debate concerning the reasons for the massive price increases for residential properties (materialized mostly between 1996 and 2005) is however still ongoing. On the one hand, there are the property bulls, who argue that the increase in the prices of residential builds is the result of natural processes of economic growth and development. In other words, they state that the increase in prices was the natural reaction to higher levels of employment, economic stability and lower interest rates. On the other hand however, sit the property bears, who claim that the increase in property prices is not linked to any economic processes, but is the result of a "bubble mentality among speculators" (Property Mark).
4. Literature review
4.1. Introduction to the literature review section
The literature review section would be divided into four primary sections. The first -- the current one -- introduces the reader to the section, its importance, construction and sources. The second details the sources which have dealt with the issue of the economic crisis and the means in which the credit crunch has impacted the residential property in the United Kingdom. The third subsection focuses on the explanation of credit rationing, a recurring phenomenon in the literature linked to the economic crisis in the UK. Finally, the last section would focus on more specific pieces which detail information on the buy-to-let side of the British real estate and its potential given the economic crisis.
Both sections would be constructed on a wide array of sources, including all books, journal articles and even websites. All of these sources revel their own advantages and disadvantages. Books are for instance mostly reliable, but they can be outdated and it is unlikely to identify a book to already discuss the buy-to-let features on the modern UK residential market. Journal articles are also reliable as they are peer reviewed, but they might also deal with past events. Magazine and internet articles are not generally peer reviewed, but they do detail topics of the present and they are relevant from this standpoint.
Regarding their role for the current research, this is a dual one. First of all, the current endeavor centralizes the most important findings in the literature and makes them available for numerous readers. Secondly however, the literature review section also reveals a less theoretical benefit. This practical role is represented by the fact that the literature review section constitutes a starting point in the analysis and research to be conducted.
4.2. Impact of the financial crisis on UK
At a general level, it is accepted that the financial crisis commenced within the United States, with the issuance of subprime mortgages. The conditions in the United States were similar to those in Great Britain. Just like the American state, the European country was witnessing a booming housing market, relaxed crediting conditions, a myriad of opaque securities and derivatives, highly indebted financial institutions and an unsuitable reliance on short-term financing (Wilkinson, Spong and Christensson, 2010).
When the financial crisis reached the United Kingdom, all these features contributed to the propagation of the problems. The first issues were encountered at the funding level and an immediate shortage of crediting opportunities was observed. Under these circumstances, the first victim of the financial sector was constituted by Northern Rock, which was forced to seek the support of the Bank of England. By February 2008, Northern Rock was nationalized.
2008 was overall difficult for the entire British financial sector. The prices of assets and equities significantly decreased and the liquidity shortage generalized. The credit and interbank markets almost froze up and several financial institutions faced severe failures. Jim Wilkinson, Kenneth Spong and Jon Christensson (2010)...
Bradford & Bingley, a building society, was partly nationalized and partly sold to Abbey Bank, a subsidiary of the Spanish bank Santander. The Royal Bank of Scotland was effectively nationalized in October 2008 as the UK Treasury took a majority stake in the company."
The three authors also mention that the situation encountered within the financial sector extrapolated to create a series of other social and economic problems. At an immediate level, the banks became unable and/or unwilling to lend the population. This gradually translated in a reduced purchasing power. At the level of the residential real estate sector, the financial restrictions materialized in lower levels of demand for and access to residential buildings.
Financial institutions restricted their lending to both households, as well as the corporate sector. For the real estate sector -- both residential as well as commercial -- this meant a decreased demand, correlated with the subsequent decrease in prices of real estate properties. At a socio-economic level, the impacts of the crises materialized in overall slower economic growth and higher levels of unemployment. The services industries were also negatively impacted as they were continually pressured; personal insolvencies became a constant. All these even further generated more pressures for the already unstable banking sector (Wilkinson, Spong and Christensson, 2010).
In a similar means of approaching and discussing the impact of the financial crisis in England, authors Simon Kirby, Ray Barrell, Tatiana Fic and Ali Orazgani (2008) argue that the largest economic problem is constituted by the decrease in national output. And they expect for the national output to continue to contract as a result of both lending restrictions, as well as restricted investments in the UK industries.
At the level of the household sector, consumer spending levels have registered significant decreases and are expected to continue to decline as the economy seeks its balance. This trend is however relatively novel and it is the result of the evolution of the crisis. As the crisis hit in 2007 and 2008, the population commenced to capitalize on its assets through sales processes commonly, as a means of subsidizing their life styles. In the short-term then, the levels of consumption seemed unaffected. Gradually however, the British population came to limit its spending and reductions in consumption levels became obvious. Another trend which has been observed within the household sector is that of prudential family financing, through both credit rationing, as well as personal savings. Within the immediate period, consumerism is expected to contract by 2, 3 per cent.
Finally, at the level of economic supply, the four authors note a massive decrease in business investments, associated with the effects and unfolding of the financial crisis. A predominant risk was constituted by the possibility of investment projects being overall abandoned, rather that just delayed. This risk further increases as the recession is confirmed within the United Kingdom.
At the level of the financial sector, the scarcity of capitals became more and more obvious in 2008 and the costs of borrowing capital significantly increased. In this light of events, the probability of business investments further decreased. Additionally, these economic conditions are expected to lead to a sustained decrease in investments as both access to funds as well as investor confidence are shuttered. The future decrease in investments is expected to be highest one since the recession of the early 1990s decade.
In terms of the residential properties, the four authors made somber predictions. In 2008, the investments in housing had decreased by over 4 per cent during each of the first two quarters. The situation as such encountered constituted sufficient grounds for the editors to assume that the following years would be characterized by even more severe decreases in residential property investments.
"Housing investment is highly cyclical and still has some way to fall before dropping to 3 per cent of GDP as it last did in the first quarter of 1996. Housing investment declined by 4.8 and 4.2 per cent at a quarterly rate in the first and second quarters of this year, respectively. Data on the volume of orders for the construction of private sector housing continue to show a fall, suggesting housing investment volumes may have continued to contract in the second half of this year. The sharp deterioration of the housing market has contributed to the poor outlook for housing investment over the next couple of years. The increasing cost of raising capital, together with the scarcity of credit, will also push housing investment volumes further downwards. We expect housing investment to continue to contract, declining by 14 per cent this year and 17 per cent in 2009" (Kirby, Barrell, Fic and Orazgani, 2008)
As for the overall crisis, Kirby, Barrell, Fic and Orazgani (2008) do not expect the first signs of economic revival until 2013. In terms of the immediate future of England, the authors argue that credit rationing would continue to put…
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