Credit Crunch on UK Residential

¶ … 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.

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. 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 and created affordability issues for the locals. 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) reveal the following changes on the lending market: "In September 2008, Lloyds TSB acquired the failing HBOS, the largest UK mortgage lender. 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 pressures on investment.

Like Wilkinson, Spong and Christensson, Kirby and his co-editors believe that credit rationing is an important trend in the UK society and that it played a massive role in the unfolding crisis. 4.3. Credit rationing Given the situation previously mentioned, it would be useful to offer a more comprehensive understating of credit rationing.

At a basic level, credit rationing is understood as the situation in which the loan request of an individual or group of individuals is denied, even when the solicitant or solicitants are willing to pay the financial and non-financial costs associated with the loan (Freixas and Rochet, 1997). At a deeper level, Jaffee and Modigliani (1969), quoted by Nunung Nuryartono (2005) stated that credit rationing occurred whenever the demand for commercial loans exceeded the supply for the same loans.

From this angle, the authors believed that the status of commercial loan interest rate impacted the rationing and generated two forms of credit rationing: equilibrium rationing and dynamic rationing. The underlying idea of credit rationing is that the loan is not rejected by the solicitant on grounds that it is too expensive, but it is in fact denied by the lender, on the costs and conditions he himself imposed.

Even in the condition in which the borrower offers a higher interest rate than that requested by the lender, the loan is still denied. Ultimately, the importance of credit rationing is given by the simple relationship it manifests within the economy -- the absence of credit rationing indicates equilibrium between demand and offer of money -- or at least sufficiency of borrowed capitals. This in turn indicates high levels of consumer spending, which fuel the economy.

Vice versa, when credit rationing is imposed, the amount of money in the economy decreases, and the economic operations also decrease (Greenbaum and Thakor, 2007). 4.4. Residential real estate in UK At an overall economic level, the United Kingdom is one of the most powerful nations on the globe. It is recognized as a trading power as well as a financial center, and a trillion dollars industry -- one of the five on the Old Continent.

Throughout the past recent decades, the efforts of the UK government have focused on the reduction of public property and control and the improvement of social programs. Great Britain was one of the fastest growing economies in Europe, but, similar to other global regions, it was severely hit by the internationalized economic crisis. The residential real estate sector witnessed the first impacts materialize in a decrease in demand as a result of restricted crediting. The prices of housing subsequently suffered reductions, after over a decade of increasing valuation.

The financial sector was in jeopardy and this prompted the government to implement a wide array of measures in order to ensure financial stability and the revival of residential real estate, as well as the overall British economy.

"Sharply declining home prices, high consumer debt, and the global economic slowdown compounded Britain's economic problems, pushing the economy into recession in the latter half of 2008 and prompting the Brown government to implement a number of measures to stimulate the economy and stabilize the financial markets; these include nationalizing parts of the banking system, cutting taxes, suspending public sector borrowing rules, and moving forward public spending on capital projects. Public finances, weak before the economic slowdown, deteriorated markedly during 2009, as did employment.

The Bank of England periodically coordinates interest rate moves with the European Central Bank, but Britain remains outside the European Economic and Monetary Union (EMU)" (Central Intelligence Agency, 2010). At the level of residential real estate, the problems were also intensifying. Housing prices had been increasing up until 2007, when they were severely impacted by the crisis and sharply fell, as revealed in the diagram below: Source: LEAP 2020, 2008 In 2008, the central and south-eastern British markets were characterized by loss of investments as well as loss of jobs.

In London particularly, 2008 was expected to bring about a 10 per cent decrease in housing prices. In the circumstances of job losses, correlated with increases in interest rates, the British populations became less and less able to finance or refinance their mortgages. Situations in which the mortgages were seized by banks or in which the people saw themselves forced to sell their properties were becoming more and more common. The trend was expected to be maintained throughout the entire duration of the internationalized economic crisis.

Additionally, since London was the financial capital connecting with the international community, it was expected that it be the worst affected region of the United Kingdom (LEAP 2020, 2008). In 2008, a major problem of British economists was constituted by the possibility of the housing crisis in UK being more severe and more dramatic than that in the United States, especially when the British economy was more reliant on real estate than the United States (Foreclosure Connections, 2008). Today, the U.K.

real estate crisis is also assessed through the lenses of the low interest rate, maintained at all prices by the Bank of England. The current interest rates are found at historically low levels -- including January 2011, the Bank of England has kept the interest rate at a record low 0.50 per cent, following a sustained path of the same low interest rate for 22 consecutive months (Straits Times, 2011).

As the interest rates are kept to a low level, the vendors of real estate properties are less tempted to retail their properties, especially when they are likely to make decreased profits. In other words, when the interest rates are kept to a low level, the cost of capital is decreased, and the mortgage rates are also lower (Stammers, 2010). This also reduces the overall value of the real estate properties. The strategy is used to reduce the risks of repeating a housing bubble.

Another element which raised additional pressures in the residential real estate sector had a social nature and referred specifically to the housing crisis. This is understood as the situation in which the offer for housing facilities was far outweighed by the demand. The situation was the result of an expanding population -- due both to immigration as well as to increasing birth rates, but also as more people live alone or purchase second properties.

In a numeric presentation, the UK government stated that the country would have to construct 240,000 new residential real estate properties per year in order to meet demand. The rate in 2010 was however of only 120,000 (Shackle, 2010). Relative to the population, 4.5 million British residents found themselves on housing waiting lists and 2.5 million British residents were living in overcrowded conditions (BBC News, 2010). In 2008-2009, the UK districts set their individual targets for building new residential properties, but none of them managed to attain these targets.

The largest failures were encountered in the Northern part of the country, where only 51 per cent of the initially established houses were built. At the opposite pole stand the regions in the south of England, where an estimated 85 per cent of the established target was accomplished. The table below reveals the figures of the targets and accomplishments for the British areas: Source: BBC News, 2010 Given this context, concerns were forwarded regarding UK's ability to build one million of affordable homes by 2020.

The main argument was constituted by the fact that -- in a context in which the political parties were cutting costs and public services -- the housing budget was being severely taxed. The National Housing Federation urged the UK government to reduce their taxation of the residential real estate sector (Shackle, 2010). In the latest report issued by the Office for National Statistics, the construction output continues to decline. The report was completed in January 2011 and integrated the months since November onwards, to compare the results against the months before November.

The results indicated that the volume of construction had fallen by 0.7 per cent. New work has also fallen by 0.5 per cent and operations of repairs and maintenance have fallen by 1.1 per cent. Simon Rubinsohn (2009) found that, as the crisis hit the real estate sector, more spaces became available and less people became interested in purchasing or renting them. He expects that this situation be maintained within the near future and argues that it is common throughout the countries in Western Europe.

In this order of ideas, according to Rubinsohn: "As a result of the sinking occupier market, rental expectations are now negative across all world regions, with weaker occupier demand likely to lead to further rises in available space and looser market conditions across all emerging and developed markets. In Western Europe, rental pessimism is bleakest in Ireland, Portugal, Spain, Belgium and the UK.

Germany remains a relative outperformer, with less negativity towards both rents and tenant demand as available space continues to decline." In this context then, a question is being posed relative to the buy-to-let housing deals. It is traditionally acknowledged that higher interest rates and the intensifying socio-economic conditions make real estate purchases more expensive. But for those investors who seek capitalization and return on investment from rentals, the buy-to-let deals are becoming more appealing now.

According to the Council of Mortgage Lenders, buy-to-let purchases have increased by 12 per cent in the third quarter of 2010 and this trend has been "supported by ongoing demand for rental property against the backdrop of a dysfunctional owner-occupier market." Their recent success is, among other things, due to the lack of trust people manifest in stocks and other forms of investment. In other words, they trust the bricks and the mortar more than they trust the financial assets.

In this order of ideas, buyers are willing to accept the risk of real estate devaluation within the short-term future. But the property is still valuable and the investment is worthy if the property meets 75 to 85 per cent of loan-to-value criteria and return 125 per cent of monthly mortgage (Lambert, 2011). According to the Mortgages website, the buy-to-led deal is understood as a situation in which an individual purchases a residential real estate property for the purpose of renting it.

The rent collected would normally exceed the value of the mortgage, and it would create financial opportunities for building maintenance. The reputable website notes the increasing interest in buy-to-led deals: "Over the past few years, more and more people have taken to investing in buy to let property as a long-term opportunity to make profitable returns, as well as a way of securing finance for their retirement plans" (Mortgages, 2010).

Overall, the increasing interest in buy-to-let mortgages is given by low prices on the real estate properties, an increasing access to funding, as well as the promise of increasing real estate values when the crisis comes to an end. The access to second properties, aimed for rental, was also increased by the fact that, historically, buy-to-let purchasers were forced to pay higher interest rates.

Recent developments have however made it possible for them to buy properties at the same rates as those for occupation by the owner, rather than at higher, rental rates. "In the current uncertain times this remains true if the correct research is carried out and with capital values lower the rental income once again becomes more attractive, with the hope of a capital growth in the future" (Association of Residential Letting Agents, 2011). 4.5. The road to recovery Today, the financial and economic sectors remain sensitive to the crisis.

The United States of America strives to develop and implement strategies by which to support the recovery of the nation. The United Kingdom on the other hand collaborates with the European Union to increase the chances of economic revival. Important emphasis is placed on globalization and integration, especially when these have so far supported the international propagation of the crisis. The integrated approach developed and implemented by the European Union in the management of the crisis is best revealed in the work by James K.

Jackson (2010) entitled Financial crisis: impact and responses by the European Union. The author stresses the role the crisis has played in revealing the growing interdependence of the European states, as well as their ability to cooperate and develop an efficient, integrated response to the crisis. Similar to the United States, most national governments in the countries of the European Union have addressed the crisis by implementing stimulus packages by which they strived to support continued economic activity.

Another particularity in Europe is constituted by the fact that the community is formed from a wide array of states, some more developed, whereas other less developed. The western states are generally more advanced and as such better able to cope with the crisis. The states in Eastern Europe however are less developed and their governments are also less experienced and able to deal with the crisis.

Instead of implementing stimulus packages, some governments in Eastern Europe have implemented austerity programs, by which the incomes were restricted and new taxes were imposed on the populations (National Institute Economic Review, 2008). Jackson argues that this situation proves an inability of the EU to develop an integrated solution.

Additionally, it might one day become able to economically integrate the countries in the eastern part of the continent, but by that time, it might be too late and the community would be unable to efficiently manage the crisis, as the eastern states would have been too severely impacted. Emphasis is also being placed on the development and introduction of more prudential financial policies and the better organization and regularization of local markets, as well as the overall European market.

Given the intense levels of integration and collaboration between the economic players in the member states, the problems in one region can easily impact the other European states. Additionally, the problems in one isolated country could come to negatively impact the financial system in other countries. Another issue is represented by the fact that the crisis -- as well as the means in which it is managed by the EU representatives -- could impact the levels of collaboration between member states.

In other words, the crisis has the ability to impact political stability in the region, but it can also impact the means in which the states in Eastern Europe implement the reforms for which they had signed up. At this stage, the European Union offers its support to these states, but fears that the persistence of the crisis might reduce its resources. Overall then, the means to addressing the crisis revolve primarily around policy making, to integrate the efforts and to create effective, union wide solution.

"Another important factor that is affecting the EU's response to the economic recession is the need to develop new policies in a manner that meshes with the carefully crafted and highly negotiated Directives that already exist within the EU framework. These Directives act as guiding principles for EU members. In particular, the call for economic stimulus has created a conflict for some EU Members who are politically and philosophically committed to the goals of the Growth and Stability Pact and with the development goals of the Lisbon Strategy.

Arguably, these agreements have helped stabilize economic conditions in Europe by bringing down the overall rate of price inflation and by reducing government budget deficits. In addition to the Lisbon Strategy, EU members likely will consider proposals to examine financial supervision and regulation within the context of the EU's Directive on Financial Services and the Financial Services Action Plan (FASP) when it engages in negotiations with the United States and the G20" (Jackson, 2010). 5.

Methodology In order to answer the research questions -- the impact of the financial crisis on the residential real estate sector in UK and the opportunity for buy to let -- a complex methodology would be used. This is traditionally known as the onion ring methodology, through which a wide array of research dimensions are approached and identified. Specifically, the research dimensions of the onion ring include the following: the research philosophy, the research approaches, the research strategies, the time horizons, and the data collection method (Saunders, Lewis and Thorhill, 2009).

The following decisions have been made: The research philosophy is a positivism one, in which data is presented from an objective angle, without the interference of the researcher The research approach is a deductive one, in which the research commences with the observation of several variables and evolves to form a conclusion The research strategy is composed -- on the one hand -- by the survey, and -- on the other hand -- by the econometrics model, represented by a statistical regression From the standpoint of the time horizons, the research project is a cross sectional one, in which several variables of the research question are assessed within a restricted time frame Finally, at the level of data collection, this would be ensured through a combination of qualitative and quantitative research methods.

This combination is entitled triangulation and reveals the characteristic of reducing the limitations of each individual method, while also maximizing their benefits (Flick, 2009). As it has been previously mentioned, a major component of the research strategy is constituted by the survey. The use of the survey constitutes the qualitative part of the analysis and it was constructed drawing from both the specialized literature, as well as the direct observation of the residential real estate market.

The survey would be issued on both mortgage lenders, as well as buy-to-let investors and private landlords and the scope is that of identifying their attitudes towards purchasing residential real estate properties today and using them for renting purposes. The sample is constituted from 50 respondents, out of which 20 are representatives and employees at mortgage lenders, 15 are potential investors and the remaining 15 are landlords. The sample was as such selected in order to integrate balance and present the opinions of the three categories of parties involved in buy-to-let deals.

This sample construction ensures higher levels of reliability and objectivity of the findings as it integrates the standpoint of three different categories. The survey which was issued onto the sample was formed from five questions, four closed questions and one open question. The purpose was that of getting the selected respondents to offer their input and perceptions on the current situation within the UK residential real estate and the opportunity for buy-to-let deals.

The questionnaire is revealed below: Question 1: What has you degree of participation in buy-to-let deals been since 2008 onwards, as compared to before 2008 and the internationalized financial crisis? a) Increased b) Decreased c) Constant Question 2: In terms of housing purchases with the scope of living in them and housing purchases for renting purchases, which would you say has been increasing in 2010 at a faster pace?: a) Owner occupied purchases b) Buy-to-let purchases c) They evolved at similar rates Question 3: How do you perceive the buy-to-let deals? a) Expensive b) Risky c) Able to generate a noteworthy return on investment Question 4: Do you think buy-to-let deals would become more popular in the future, and if so, why? a) Yes, because they will generate sustainable return on investment when the crisis is over and the housing prices increase b) Yes, because such investments in real estate properties are more trustworthy than investments in intangible assets c) No, they would not become more popular.

Question 5: How do you envision the future of buy-to-let deals? Please respond openly. 6. Data analysis, test and results The data analysis will contain of several different parts, aimed at providing the econometric and statistical information that will be used in the final conclusions of this project. The first part will identifies some of the economic, financial and property-related variables that will need to be analyzed here.

In the case of the property prices for South Eastern England, the paper will look into their evolution from 2007 to 2010, both in terms of number of sales for representative areas of three different towns and the average prices for the sales made. The second part will aim, through regression analysis, to provide a correlation between two variables, one reflecting the financial stability (10-year bond yield), the other the purchasing trends (mortgage lending for household purchases). Variables The variables will be included or will be covering two different categories, as such: 1.

The instability of the financial economy; 2. Property variables. 1. The instability of the financial economy The variables in this category include governmental bond yields, volume of investments in equity funds, capital ratios, changes in yields and spreads of selected assets, the cost of default protection for UK sovereign debt and IMF sovereign debt projections. The ten years bond yields would be used in the regression and they are presented in the annexes. These variables occasionally reflect a contradictory image of the financial stability.

On one hand, the trend points towards investors being attracted towards assets perceived as being safe and, as such, an increased demand for this type of assets (the Bank of England, 2010). However, with government bond yields remaining at significantly low values (the government bond yields have constantly decreased from a maximum value of around 15% in the 1970s and 1980s to under 3% today), investors are also seeking the maximization of their returns in other forms of investment.

Some have migrated towards emerging market economies, where higher risk investments provide higher returns, but one may assume that some have also migrated towards investments in fixed assets such as property. The cost of default protection for UK banks continues to remain low, as compared to other European countries (chart 5), which tends to show that the banking sector in UK is fairly strong and that this has a positive impact on the overall stability of the financial economy.

As the report points out, financial stability could still be threatened by a reversal of bond yields internationally, which would mean that an increase in bond yields would lower demand for assets and decrease these prices, with a potential negative impact on the banks' balance sheets. The correlation government bond yields-asset prices-balance sheet elements-refinancing from banks-overall financial stability in the UK seems to be followed. 2.

Property prices This part of the data analysis subchapter will look at relevant information of both the average price of sales and the number of sales in that year. The period analyzed will cover the time from 2007 to 2010 and will include three towns in the South-East England (Norwich, Ipswich and Colchester). For greater accuracy, one street, the one with the most sales in 2010, has been selected from each town and used for comparison in terms of price of sales and number of units sold.

At the same time, larger cities were avoided from the analysis, considering that many of the factors affecting the prices in such cities may be less relevant at a regional or national scale. As such, there are two property variables that will be considered in the analysis: number of sales and average sale price. The tables below incorporate the main findings.

Taverham Road, NORWICH 2010 2009 2008 2007 Average sale price 301,714 229,000 220,000 346,181 Number of sales 7 2 1 7 Reavell Place, IPSWICH 2010 2009 2008 2007 Average sale price 116,062 94,562 95,000 Number of sales 35 36 1 Chinook Highwoods, COLCHESTER 2010 2009 2008 2007 Average sale price 132,070 118,784 129,083 133,892 Number of sales 7 7 12 35 The values and their evolutions are integrated in the three charts below: In most of the cases analyzed, the absolute value for the two variables seems to point out towards a similar pattern: high volume of sales in 2007, at high average prices, followed by a decreasing period 2008-2009, over the economic crisis, with significantly lower sale prices and volume of sales, and a rebound in 2010, both in terms of prices and number of sales.

Regression analysis Based on some of the variables presented previously, the regression analysis was run with the 10-year bonds yield as the X variable and the mortgage lending for new house purchases as the Y variable. The idea is to determine whether the X variable is correlated in any way with the Y variable and, as such, whether the financial stability/instability influenced the evolution of mortgage lending.

The latter is a key factor in determining whether the financial crisis has had an impact on the real estate market and in what way: the trend in mortgage lending shows whether there is still interest towards new purchases. For the X variable, a monthly average was calculated based on the daily value of the yield, as reflected in the Bank of England statistics. The summary of the results of the regression analysis are presented below, along with the scatter chart mirroring the values for the X and Y variables.

SUMMARY OUTPUT Regression Statistics Multiple R 0.072839781 R Square 0.005305634 Adjusted R. Square -0.027850845 Standard Error 1.237800682 Observations 32 ANOVA df SS MS F Significance F Regression 1 0.245171672 0.245172 0.160018 0.691974117 Residual 30 45.96451583 1.532151 Total 31 46.2096875 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 4.575339511 1.569083428 2.915931 0.006651 1.370843656 7.779835 1.370844 7.779835 4.504434783 0.158751386 0.396856136 0.400023 0.691974 -0.651736966 0.96924 -0.65174 0.96924 The most important result in the regression analysis is the multiple R, which shows the actual correlation between the two variables, whether there is any relationship between the two. In this case, the multiple R. is small, at a value of 0.072, and is also positive.

This means that when the X variable (10-year bond yield) increases, the Y variable will also increase. However, as pointed out, the correlation is fairly loose between the two. The scatter chart that reflects the two variables shows a trend that seems to be the same for X and Y only up to December 2008. After that moment, the two variables seem to have a negative correlation. 7.

Discussion The previous section has demonstrated that the internationalized economic crisis has generated a negative impact on individual purchasing decisions within the United Kingdom residential real estate market. This relationship has been best observed within 2008 and 2009, when the crisis was worst felt. In its commencement in 2007, the volumes of sales and the average prices were following an ascendant trend, but starting with 2008 and continuing through 2009, both variables were met with decreases. Starting with 2010, the situation appeared to be revitalizing, yet it has still to reach its pre-crisis values.

Given the regression analysis, the result is clear and indicates that the financial crisis has impacted the housing sector in England, responding as such the first research question. Regarding the second research question -- the opportunity for buy-to-let deals -- this was addressed through a survey and a qualitative discussion, which would be presented hereby, and would also integrate the findings, as they were collected from the respondents.

In this order of ideas, the following are noteworthy: The majority of the respondents -- in all of the three categories --, namely 70 per cent of them, indicated that they had participated less in buy-to-let deals since the crisis impacted the United Kingdom as compared to 2007 and before. The explanation for this outcome is constituted by the fact that the crisis impacted the purchasing powers and the trust in the financial system. In this sense, overall purchases in the residential real estate sector decreased, impacting also the buy-to-led subsector.

At this level however, decreases in transactions were also observed as a result of another phenomenon. Throughout the years before the crisis, the access to mortgages was increased and the credit conditions were more relaxed, making it easier for investors to sign buy-to-led deals. As the crisis hit however, the financial institutions reduced the population's access to borrowed funds and made the respective deals less appealing to the investors.

In terms of growth rates of buy-to-let relative to purchases for residential purposes by the owner, the 60 per cent of the respondents indicated a higher growth rate in the case of buy-to-let deals. 10 per cent indicated that a higher increase was observed at the level of first time owner purchases, whereas 30 per cent argued that they had not noticed a difference between the growth rates of the two types of purchases.

This situation is best explained by the fact that investors are now better able to access funds at lower interest rates. Additionally, in the past, buy-to-let investors were forced to pay higher taxes on their properties, but, as a result of the crisis, they are now able to make purchases at similar conditions to those buying homes with the scope of living in them. In terms of perception from investors, mortgage lenders and landlords, the attitudes they have over buy-to-let deals differ.

55 per cent of the respondents nevertheless indicated that they were able to generate a noteworthy return on investment, and.