Effects of the credit crunch in terms of regeneration and redundancies - Literature review Example

Effects of the credit crunch on Sunderland Council in terms of regeneration in the and redundancies carried out by the Council Literature review Initiation of the credit crunch It is important to understand the appropriate meaning of the term credit crunch, prior discussing initiation and implications of the same in the United Kingdom, specifically in Sunderland. Credit crunch is a situation when lenders stop lending, borrowers fail to borrow, builders cease their activities and buyers are forced to exhibit their inability to buy. In specific manner, credit crunch can be defined as a sudden stoppage in availability of credits as well as loans, causing shortage of liquidity in the market. Since 2008, such a situation has resulted in development of a complex set of issues in various countries that is continuously worsening (Shiller, 2008). According to Erkens, Hung and Matos (2012), the present credit crunch was initiated in 2007 in the United States, when lenders were heavily exposed to mortgages worth billion dollars, which turned into bad debts. The authors further added that the viability of the subprime loans related to mortgage has a significant impact on the global financial system. Consequently, banks and other financial systems were no more interested to lend to borrowers, which created a chain reaction reaching national financial system of various nations. By the end of 2008-09, the housing bubble in the United States (US) busted and resulted in collapse of several prominent banks. Interest rates also increased significantly during this period. According to Parkinson (2009), the trend had followed in the property as well as construction industry, bringing about a drastic impact on regeneration. The British Property Federation (2014) revealed that the effect of the situation was realised in the European markets as well, especially in the United Kingdom (UK). Impact of credit crunch on commercial property market of the United Kingdom Survey by British Property Federation (2014) suggests that during early 2000s, an unprecedented boom was observed in the commercial property market of the UK as it was a major beneficiary of the capital flowing from various equities. The report further highlights that price of commercial properties increased by about 53%. However, after enjoying the financial boom for approximately 6 years, the property sector experienced tremendous drop in price, which was lower than yield on the government bonds. According to the States of English Cities, cities in the UK in terms of regeneration enjoyed extensive growth prior 2001. Compared to other areas, regeneration zones exhibited considerable improvement (British Property Federation, 2014). An analysis by the Investment Property Databank (IPD) suggests that between 1980 and 2001, performance of investment in regenerated areas have been comparatively better than other areas in England. The report further identified that annual return from regeneration areas was 10.7% as against 10.2% from other areas. In addition, the trend was observed in retail, commercial as well as industrial areas. However, recent studies by IPD reveal that after 2007, areas that were covered under government regeneration programs showed maximum vulnerability in context of market and economic downturn as compared to other kinds of investment property (British Property Federation, 2014). It was observed in the same study that while other property sector face a decline of 3.4% in returns, that of regeneration sector was as high as 6%. According to the IPD study, heavy investment in regeneration sector was undertaken due to high capital value, low land and development cost and freely available funds. In this context, Parkinson (2009) added that the cause of turbulence in the regeneration sector that has been highlighted in the research is rise in marginal risk, which arose from increased development cost and decline in confidence of investors and market demand. Impact of credit crunch on regeneration activities of the United Kingdom Additional reports by the British Property Federation (2014) highlight that during the asset bubble, the value of commercial property rose by about 53 percent, while it dropped by 43 percent in 2007. These figures show some scope of recovery. However, the residential property market was the worst sufferer because between 1995 and 2007, the value of such property grew as high as 162 percent. Authors such as Parkinson, Foley and Judd (1988) have proposed in their study that high growth encourages private players to participate in the property market. In addition, the planning system of England did not contribute sufficiently in this regard, resulting in increasing level of volatility (British Property Federation, 2014). Report by the British Property Federation (2014) discloses that sharp contraction in the credit supply was witnessed with the inception of economic slowdown In England. As a result, regeneration agencies and property companies were left with little fund to finance new schemes. In addition, the declining cost commercial as well as residential properties discouraged investors heavily, causing cancellation of numerous planned projects in the commercial and residential property market (British Property Federation, 2014). British Property Federation (2014) divulged that recession affected property development and regeneration in different cities of the UK dissimilarly. The areas that suffered most were small cities in the midlands and northern parts, while condition of London and south eastern areas were comparatively good. Private property developers as well as regeneration agencies faced a number of problems particularly related to poor supply of credit and greater risk premium with marginal projects. Surprisingly, it was observed that not all regeneration sectors were affected equally. It was mostly housing projects that faced greatest impact of the credit crisis. In a review report on Sunderland, it was stated that the recession had tremendous negative impact on its labour market. Additionally, a number of businesses related to regeneration schemes had failed at that period (Dolphin, 2009). In the UK, regeneration activities exhibited a mixed picture; some of the schemes were hardly affected by the ongoing recession, whereas other projects got delayed for indefinite period. Studies show that residential projects were the most critical segment of all and a number of projects were scraped due to unavailability of investment. Various research reports suggest that residential regeneration activities reduced by more than 50 percent within a span of 12 months, while regeneration agencies are anticipating further decline in next few years. The regional picture showed that nearly all areas were affected by the credit crunch. In addition, a long list of severely affected projects was also witnessed (British Property Federation, 2014). According to the South East District Council (cited in Dolphin, 2009), a majority of the key development projects were halted during this period. Around two national development projects were scraped. Private developers also left many projects on hold due to unavailability of fund. By large, in different sites, the total number of on-hold projects in respect of housing units were around three to four thousand. According to the Northern Core City (cited in Dolphin, 2009), three major private regeneration projects were abandoned by authorities. Moreover, less attractive sites in the city were discarded, resulting in heavy pressure on the regeneration objectives. Even so, according to other councils, some of the projects were unaffected because the agencies were committed to long-term finance at a fixed rate. The given scenario has raised questions on viability of the regeneration models. Arguments were presented against investment and partnership between the public and private sectors. Significance of partnership models were also challenged during the given period. Then again, Royal Institution of Chartered Surveyors advocated that Purchasing Power Parity and Local Asset Backed Vehicle models were feasible through adjustments in risk allocation (Dolphin, 2009; Hagen, 2002; British Property Federation, 2014). Methodology The methodology of the given dissertation considers various research approaches and tools that can be utilised in order to accomplish the research related to impact of credit crunch on the regeneration activities in Sunderland. Research philosophy Research philosophy defines the basic structure of a research, which has been followed by the researcher throughout the process. According to certain authors, research philosophy can be stated as a broad framework that precisely explains the methods whereby information is accessed for research purpose. Certain authors also advocated that it is the research philosophy that explains appropriate techniques for data collection and analysis of findings. Primarily, there are two philosophies that can form grounds for a research, namely interpretive philosophy and positivism philosophy. In context of the current dissertation, interpretative research philosophy was not considered suitable as it primarily focuses upon human behaviour and other behavioural traits of the society. The researcher has conducted the entire research work based on positivism approach. The rationale behind the given choice is to produce an outcome that is measurable. Consequently, the researcher collected data that are relevant to the subject matter and applied appropriate tools for analysing the same (Kumar and Phrommathed, 2005). Research approach A research work can be conducted through two basic approaches, namely deductive and inductive. In this context, it is important to note that both these approaches are contrasting in nature. Inductive research approach has been adopted, where the researcher has formulated theories related to the subject based on analysis and interpretation of the available data. This approach is also known as theory building approach. Within the purview of inductive approach, the researcher has enumerated the effect of credit crunch on regeneration activities in the Sunderland area and role of the local council in mitigating these issues. On the basis of findings obtained, the researcher has provided further recommendations. The deductive approach was not considered appropriate herein because it is concerned with development of hypothesis or research questions based on the existing theories. Even so, there is no existing theory that can be applied on the given subject (Kumar and Phrommathed, 2005). Research design Research design can be of different kinds and are primarily classified as descriptive, exploratory, explanatory, evaluation and predictive. The design of a particular research work depends explicitly on information available regarding the same. In this dissertation, the research design that was considered appropriate is a combination of descriptive and exploratory design. The reason for selecting the same was to avail accurate and valid data, which can be represented in a proper manner for establishing its relevance to the research question. On the contrary, the exploratory design was regarded as appropriate as it deals with uncertain scenarios similar to the one created by credit crunch in the Sunderland area, which has brought about redundancies on part of the local council. As a part of research design, the research required both qualitative and quantitative analysis tool for conducting appropriate analysis (Marczyk, DeMatteo and Festinger, 2005). Research method: Qualitative and Quantitative The research method defines various steps that are necessary to be accomplished in a particular research work so as to answer the research question. The research method in the current dissertation is based on research design and research philosophy. The researcher has made proper utilisation of the qualitative as well as quantitative research techniques. Quantitative techniques In the current paper, after evaluating available information relevant to the research topic, the researcher considered application of statistical tools as the most suitable method of data analysis (Patton, 2005). Qualitative techniques In context of the research subject, it was difficult to undertake qualitative study based on traditional literary works. Hence, the researcher relied greatly on authentic and publicly published articles for developing the literature (Newman, 1998). Data collection and sampling In the current research, the researcher was unable to consider entire population for the purpose of research work. As a result, the researcher selected an appropriate sample that accurately represents the entire population as well as serves the purpose of quantitative analysis. Judgmental sampling was considered apposite, given the critical nature of information related to the subject. Data was collected from secondary authentic sources such as, government databases. The reason for selecting judgmental sampling is that these data are of national importance and cannot be gathered from random sources. Collecting such data from random sources may raise question on viability and reliability of the research (Kumar and Phrommathed, 2005). Data analysis For maintaining simplicity and high degree of understanding in the project, complicated analysis tools have been avoided for data processing. In the quantitative analysis, the researcher utilised excel tools and graphical tools such as, bar graphs, for representing the data. The primary reason behind employing graphical tools is that graphical representations are easy to comprehend, highlight the necessary information in an uncomplicated manner and can be modified as per requirement. Another useful technique of data analysis employed is correlation analysis. The correlation method is a linear quantitative tool of analysis, where nature of relationship between two variables is established through numeric values. In correlation, the values lie between -1 and 1, which represents negative or positive correlation respectively and 0 signify no correlation between credit crunch and regeneration activities (Kumar and Phrommathed, 2005). Reliability test The comprehensiveness and accuracy of the research was validated through reliability tests. Reliability tests help in determining consistency of a report. A number of reliability tests can be applied in a research such as, test-retest reliability and parallel forms reliability. Test-retest reliability is administered to test the results twice so that confidence level of existing correlation can be maintained. On the other hand, parallel form of reliability compares and establishes correlation between the results of two different methods (Kumar and Phrommathed, 2005). Ethical considerations There are a number of ethical or moral considerations that every researcher must abide by in the process of research work. These ethical factors are necessary to be considered while formulating a research proposal. In the current dissertation, the researcher was able to draw appropriate conclusion based on the literature review and findings of the data analysis. Moreover, the researcher ensured that data collected from the various sources were used in an apt manner and were not mishandled. The research did not involve questionnaire, focus group interview or any similar data collection methods. Therefore, maintenance of confidentiality regarding personal information was not considered. Reference list British Property Federation, 2014. Regeneration and the recession. [pdf] British Property Federation. Available at: [accessed 14 August 2014]. Dolphin, T., 2009. The impact of the recession on northern city-regions. [pdf] IPPR North. Available at: [accessed 14 August 2014]. Erkens, D. H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), pp. 389-411. Hagen, R., 2002. Globalization, university transformation and economic regeneration: a UK case study of public/private sector partnership. International Journal of Public Sector Management, 15(3), pp. 204-218. Kumar, S. and Phrommathed, P., 2005. Research methodology. New York: Springer. Marczyk, G., DeMatteo, D. and Festinger, D., 2005. Essentials of research design and methodology. New Jersey: John Wiley & Sons Inc. Newman, I., 1998. Qualitative-quantitative research methodology: Exploring the interactive continuum. Illinois: SIU Press. Parkinson, M., 2009. Guest Editorial The credit crunch and regeneration. Journal of Urban Regeneration and Renewal, 3(2), pp. 115-119. Parkinson, M., Foley, B. and Judd, D. R., 1988. Regenerating the cities: The UK crisis and the US experience. UK: Manchester University Press. Patton, M. Q., 2005. Qualitative research. New Jersey: John Wiley & Sons, Ltd. Shiller, R. J., 2008. The subprime solution: How todays global financial crisis happened, and what to do about it. US: Princeton University Press. Bibliography Athey, G., 2009. Economic development in the UK: challenges during and after the recession. Local Economy, 24(6-7), pp. 604-611. Broughton, K., Berkeley, N. and Jarvis, D., 2011. Where next for neighbourhood regeneration in England? Local economy, 26(2), pp. 82-94. Gibb, K. and O’Sullivan, A., 2010. Housing-led regeneration and the impacts of the credit crunch. Local Economy, 25(2), pp. 94-107. Haran, M., Newell, G., Adair, A., McGreal, S. and Berry, J., 2011. The performance of UK regeneration property within a mixed asset portfolio. Journal of Property Research, 28(1), pp. 75-95. Read More