The Effect of the Economic Downturn on the Properties Industry in South of France - Coursework Example

The effect of the economic downturn on the Properties Industry in South of France: Cote D’Azur , Province Review of Existing Literature An acute increase in the mortgage lending and an observable effect of wealth has boosted real estate bubbles as well as consumer spending in all developed countries. However the downswing in the property markets experienced by those contexts pushed this whole process in a reverse resulting downward mortgage loans, weakening of bank balance sheets and depression of consumer spending (Allen and Carletti, 2009; Nordlundm and Lundstrom, 2011; Woods, 2007). The collapse of the US banks in the year 2008 – begun especially with the Lehman Brothers bank – had a critical impact in triggering an era of crisis that quickly spread into the other parts of the globe as well. As a result of this crisis the inter banking market across the world has quickly dried out; this was added with the additional factors like subtler and more difficult lending conditions, higher prices of borrowing for companies to accumulate capital assets, expand and/or maintain their existing business volumes and constant collapses suffered by the stock markets (Jannsen, 2009; Allen and Carletti, 2009). The slumping confidence of consumers which reflected in the business sectors as well has become a major factor behind the consistently dropping rates of Gross Domestic Product (GDP). The net results of these events has been a more than noticeable decline in the investment areas of corporate sector in addition to a major restocking and a compressing experience in the world trade segments as also threatening levels of deterioration in the labor markets across the world – this has been particularly true in the case of property industrial workers (OECD, 2008; ILO, 2009; Woods, 2007). This situation, unprecedented at least ever since the 1945 crisis, has caused the Organization for Economic Cooperation and Development countries (OECD) to experience a contraction in their combined GDP by 4.5% from its elevated conditions that the first half of 2008 had witnessed. From this peak conditions the GDP of the OECD countries reached right into the bottom levels by the first half of the year 2009. Nevertheless the intensity of the trauma experienced by the different economies was also further subject to the specific – both internal and external – conditions of those countries. These were, by and large, further determined by previous excesses in the debt levels and the condition of the financial institutions, the capacity of the respective economy to spring back and adjust itself to the crisis – further depended upon such factors as the wealth effect’s significance, the extent to which the economy has remained open to the global financial institutions, the efficiency of the automatic stabilizers and so on. (OECD, 2008 and 2009). In other words the impact of the crisis on different countries has varied considerably from each other depending upon a large number of other factors that were specific to those economies. A clear reflection of this heterogeneity in the intensity levels of the crisis’ impact could be had from the context of Europe itself where this impact has been acutely abrupt and varied with countries like UK (-5.7%), Italy (-6.5%) and Germany (-6.7%) having undergone a peak to trough trend whereas countries like France (-3.4%) and Spain (-4.1%) experiencing only comparatively milder levels of impact. However the French economy has started showing definite positive symptoms by the second half of the year 2009. Apart from France only Germany and Japan did manage to show symptoms of some growth during this period (OECD. 2008). It is precisely amidst this global scenario that the question of housing and mortgage markets has been located. The housing and mortgage market has played a significant role in most of countries apart from the major influence it has exerted, in terms of its role in the current crisis, in the United States and some of its European counterparts. Drawing a comparison with the housing market the price cycle in Commercial Real Estate markets (CRE) has suffered serious setbacks during the ongoing crisis situation in most of the countries. There have been major differences in the price cycles of commercial and private properties, especially in the case of US, UK and Ireland. The down slope in the prices of commercial property has far exceeded what is the case with the prices of private and other residential properties (Ellis and Naughtin, 2010) with the only exception of France. However the run-up in the prices of properties reserved for commercial use is not sufficiently demarcated (University of Ulster, 2009; Ellis and Naughtin, 2010). The gigantic downward trends both in the value and quality of properties in some of the major property markets have caused this area to be prima facie afflicted severely with the ongoing economic situation. The fact that the sector of commercial properties has remained by and large vulnerable to the general economic downturns in a much more intense manner than the residential properties and housing markets segment has been a crucial phenomenon in this (Ellis and Naughtin, 2010). The situation is further worsened with the negative implications on bank loans. A multiplicity of factors have generally contributed to this situation that identifying any single core areas is difficult to be demarcated as being the main cause. The changes in the markets of housing are similarly significant in stabilizing the financial segments although the loan failures for banks have always tended to be felt more acutely in the commercial sphere – captured well in the CRE lending – than in the loans granted to private households or for residential purposes. Ellis and Naughtin (2010) observes that the implications of the crash in the sub prime domestic property market in the US deserves much more wider reading since it has severely affected the employment rates in throughout the US, Europe, Australia and many African countries and have also been threatening the major infrastructure projects and eventually even the national growth rates in many of the latter African and Asian countries (European Economic Forecast, 2010). As could well be expected, the current recession has had a drastic negative implication on construction projects of different sorts as well as on the frequency and size of economic transactions in the context of France as well. Notwithstanding this, the first-time buyers in France were not as acutely affected by the situation as many of their counterparts in other parts of the Europe has experience (Bosshard, 2009). The vicious circle of mortgage lending, bubbles of real estate and consumer spending has not happened in France. Because in this country, wealth effect has been less pronounced and the strict lending requirements keep the risk of real estate bubbles under control ( Politque Economique, 2009). The frequency at which defaults of payments as well as repossessions occurred in France remained almost at a standstill position in 2008 as compared with the figures in 2007, and further at an extremely low rate in 2009 and 2010. This is never at par with the extreme situation that prevails, for instance, in both UK and Spain (European Economic Forecast., 2010). The increasing rates of unemployment, as opposed to similar situations in other especially European countries, have failed to exert a major negative impact upon the repayments of the first-time buyers. This has remained so specifically because the categories most affected by lack of employment opportunities, the young and educated, do not constitute any substantial portion in the category of the first-time buyers. Vorms (2011) argues that through drawing a comparison between France and some other major economies in this context, like the US, UK, Germany, Canada and so on, the persisting risk factors for the first-time buyers could be identified and the favorable situation prevailing in France could be usefully explained (Nordlundm and Lundström,2011; Woods, 2007). Research Problem In this context, interesting research problems arise: i) why and how France could survive this economic catastrophe; ii) how far the economic down turn affected the property market in France ( Banque De France, 2010 and Politique economique, 2009). Countries like Germany and France, where the more or less rigid lending procedures constantly regulate the risk associated with real estate bubbles, were considerably exempted from the vicious circle of economic crisis and property market downturn experienced by other developed nations. The lending structure of the country is comparatively strict and the wealth effect has historically been less prominent (Politique economique, 2009). The positive attempts of survival by the property market in France are highly attributed to the appropriate and adequate government and public intervention. A public investment of $33 billion was announced by the President of France on December, 4, 2008 itself (Jackson, 2009). The public investment package announced by the government aimed to accelerate the construction and property markets in the forms of renovation of university buildings, construction of 70,000 new houses and 30,000 unfinished houses (Jackson, 2009; Halt and Tindall, 2010). Also the unique kind of corporate governance in France has prevented the property market from affecting the people much. Government has got important role in deciding the flow of credit. Nationalized banks and government play crucial roles in deciding the direction of credit and hence, protecting the property market from the crisis to a certain extent (Halt and Tindall, 2010; Allen and Carletti, 2009). Objectives of the Study The major objective of the study is to analyse the impact on and responses of real estate and property development firms to the economic downturn. The responses in terms of strategic changes and price adaptation techniques of these firms are intended to be analysed. The responses of these firms to the changes in the consumer behaviour are also to be analysed in the study. Research Methodology Sources of Data The present investigation will be based on the information both from the secondary as well as primary sources. The basic secondary data on the major trends of financial crisis in the country as well as of the selected province will be collected from the publications from the government. The websites of official (banks, government and local governments) as well as private firms will be used for the analysis. Information about new registration of properties can be available through government website. As different sections for the new and old properties statistics in the government, trend and growth of the property market can easily be analysed. Like wise, data on average prices of the properties during a period of time (say, from 1985 to 2011) can be accessed through government website. By collecting the secondary information from government and private sources, the price fluctuations (inflation and deflation) of the property market can be examined. Hence, before and after 2008-09 can be analysed. As this large volume of data is available from the reliable government sources, a strong base of the data can be made use of for the further analysis. Primary Information may be collected from the directors from the property management organizations, important property firms, workers in the real estate and property firms, customers and consumers. The strategies adopted by the firms can be inferred from the top level persons at these organizations. The important part of our analysis, that is, how some firms could withstand the crisis while others not, can largely be addressed from the responses and opinions of these persons. Directors of Sotheby , South of France division and Pierre et Lumieres are planned to be interviewed with this purpose. Apart from them, directors from some other important real estate firms are to be approached. Interview with the workers in the existing firms will throw light on another side of the issue; that is the impact of economic downturn on the employment especially in the real estate and property sector can be examined. The consumers’ and customers’ responses can also be collected through questionnaires as their responses are also highly valuable and relevant for our analysis. Methods of Primary Data Collection Interviews and questionnaire methods are the important primary data collection method which I intend to use in the present study. Interview, one of the most elementary methods of data collection, is definitely a complicated process than just asking questions to get answers. The main potential of interviews lie precisely in the fact that it can yield deeper insights about the everyday living experiences of people, the values they follow, their opinions and ambitions, and also their attitudes and even the most subjective feelings. Beyond the technicality of its practice as a research method, interviews are required to be conducted by sufficiently considering the contextual specificities and the societal and interpersonal aspects (Denzin 2000, 645-647). For this reason in-depth and semi structured interviews are preferred in this study precisely to allow more flexibility in order to draw on the subjective meanings that the respondents attach to the larger transformations occurring. While in-depth interviews can allow more informal and free interaction with the respondents (Knight 2002) remaining semi structured enables the researcher to add and change questions, and even to change the direction of interactions with the respondents, according to the newer insights that might be drawn during the course of interview itself. The latter changes and additions are important to the extent it keeps the researcher on a flexible trajectory than a rigid one, at the same time as anchoring himself to the basic research questions. Keeping away from a fully structured interview schedule also saves the researcher from the difficulties involved in the variations that may be required later and also exempts him from the pre-determinations that may affect the study inversely. For the in-depth interviews, list of topics covering the research problems will be selected and the topic guide will start with introductory questions and later more interpretative and complex questions. Quantitative methods like Questionnaires may be used as collecting the information freely and without any bias as it is planned to collect the responses of the consumers. Instead of using explanatory questions, direct as well as multiple choice questions may be designed. Sampling Method and Sampling Area Convenience sampling method may be used for the selection of the sample, the sample of people who are willing to be interviewed. Balanced sampling method may also be used for the selection of people considering regional backgrounds. The property development organizations in which I have got personal access (as we own such an institutions in South of France), will help the interview with higher level persons in this field. As a first attempt, I plan to interview the Director of Sotheby , South of France division, I hope to get an overview of the responses of the property markets in this province. The required information and sources of necessary database concerning the luxurious market properties in France may be availed through this interview. The second important interview is planned as with a company Pierre et Lumieres that focused on creating holidays village for tourist in every area in France. This will give insights about the middle class consumers, their spending and the effects of economic downturn on these particular strata of the society. Based on these pilot interviews, data and information are to be collected from some other important property firms in the province. The selection of the consumers (sample) may be done by consulting the people working in the property firms. The customers lists can be collected from them. The impact of economic downturn can correctly analysed on the basis of the interviews with the sample from this group. As the area of the present study covers Cote D’Azur , Province, questionnaires and other quantitative methods may be applied to the sample persons from this area to gather more information about the responses of the customers to the economic downturn. In other words, for indepth study, Cote D’Azur , Province, may be selected. 6.4 Data Analysis For analyzing the data, suitable statistical and mathematical methods will be used. Apart from simple statistical tools like graphs, percentages and tabular analyses, various methods like indices, correlation and regression techniques may be used to make my analysis more scientific and precise. Using advanced econometric models and statistical tools, the impact of economic crisis on property industry can be analyzed and the effects on the different aspects can be identified. The modified versions of the models which are used to capture multi-facet dimensions of economic crisis and housing market would capture the de-composed effects of economic downturn on the property market in a country or in a particular locality (Vorms, 2010 ; Ferrara and Koopman, 2009). Reference Allen, Franklin and Elena Carletti. “The Global Financial Crisis- Causes and Consequences”. 2009 www.bm.ust.hk/.../Prof.%20Allen%20&%20Carletti_The%20Global%20Financial%20Crisis.pdf BANQUE DE FRANCE. “The Economic and Financial Crisis”. Documents and Debates. No.3. January, 2010. http://www.banque-france.fr/gb/publications/telechar/documents-and-debates/january-2010-n-3/financial-crisis-economic-crisis-documents-and-debates-n3.pdf Bernard Vorms, translated by Oliver Waine. “Access to home-ownership: what are the effects of the economic crisis?”. Metropolitics. 20 April 2011. URL : http://www.metropolitiques.eu/Accessto-home-ownership-what-are.html Bosshard, Annalis. The Current State of Property Market. March, 2009. Url: http://www.ab-real-estate.com/newsletters/images/nl6/AB_Newsletter_March.pdf CEMR. Impact of the Financial and Economic Crisis upon the Local and Regional Governments. The Council of European Municipalities and Regions (CEMR). March, 2009. Paris. Denzin, Norman K., and Yvonnas Lincoln eds. Handbook of Qualitative Research (2nd Edition), 2000, London: Sage. Ellis, Luci and Chris Naughtin. “Commercial Property and Financial Stability- An International Perspective” Bulletin, Reserve Bank of Australia. June, 2010. P25. European Economic Forecast. “France: Edging Towards Recovery”. European Economic Forecast. Spring, 2010. 95-98. Ferrara, Laurent and Siem Jan Koopman. Common business and housing market cycles in the Euro area from a multivariate decomposition.November 15, 2009. Url: http://www.banque-france.fr/gb/publications/telechar/seminaires/2009/041209/Ferrara_Koopman.pdf ILO. The current global economic crisis: Sectoral aspects. International Labor Organization. March, 2009 url: http://www.ilo.org/public/libdoc/ilo/GB/304/GB.304_STM_2_2_engl.pdf Jannsen, Nils. National and Internationational Business Cycle Effects of Housing Crises. Working Paper 1510. April, 2009. Keil Institute for the World Economy, Dusternbrooker, Keil, Germany. Jackson, James. K. ‘The Financial Crisis: Impact on and Response by The European Union Specialist in International Trade and Finance’, Congressional Research Service June 24, 2009 http://fpc.state.gov/documents/organization/127015.pdf Knight, P T. Small Scale Research, 2002,London, Sage Nistorescu, Tudor and Cristina Ploscaru (2010). Impact of Economic and Financial Crisis in the Construction Industry. http://www.mnmk.ro/documents/2010/3NistorescuFFF.pdf Nordlundm Bo and Stellan Lundström. Commercial property and financial stability. 2011, www.riksbank.com/upload/Rapporter/2011/RUTH/RUTH_chapter5.pdf OECD. Responding to the Economic Crisis: Fostering Industrial Restructuring and Renewal. July, 2009. Url: http://www.oecd.org/dataoecd/58/35/43387209.pdf OECD, Impact of the Economic Crisis on Employment and Unemployment in the OECD countries. OECD Economic Outlook. No.84, November 2008 University of Ulster. The Global Financial Crisis: Impact on Property Markets in the UK and Ireland. March, 2009: University of Ulster Real Estate Initiative. Politique économique . ‘Why has France withstood the global economic crisis comparatively well ?’, October 2009, http://www.ambafrance-lk.org/spip.php?article716 Woods, Maria (2007). A Financial Stability Analysis of the Irish Commercial Property Market. http://hb.betterregulation.com/external/A%20Financial%20Stability%20Analysis%20of%20the%20Irish%20Commercial%20Property%20Market%20by%20Maria%20Woods.pdf . Read More