Property Cycles: The UK Experience - Research Proposal Example

Property Cycles – UK Experience Part One Rationale and Aim of the Research Current research is based on the property market of UK especially regarding the so-called property cycles and their effects on local economy. The particular issue has been extensively examined in the literature and it has been noticed that ‘the housing market, which has been particularly cyclically volatile in the past 30 years, has contributed to cycles in consumption through its impact on housing wealth; increased house prices increase the value of assets held, and impact on consumption, making the economy more cyclical’ (Barrell et al., 2003, 53). The above described cycles have been proved to have a significant role on the development of national economy (or its decrease during periods of recession). The research focuses on the effects of property cycles on the economy of Britain as these effects can be observed on the daily consumption behaviour of people across Britain. All parts of the property market development as well as the risks that are related with the specific part of the economy are going to be analyzed emphasizing on the potential use of property cycles in order to support the local economy. Part Two Bibliography The following studies have been used so far for the preparation of this proposal and are expected to contribute to the successful completion of the dissertation. Barrell, R., Choy, A., Riley, R. (2003). Consumption and Housing Wealth in the UK. National Institute Economic Review, 186: 53-57 Britton, J., Warren, T. (2003). Ethnic Diversity in Economic Wellbeing: The Combined Significance of Income, Wealth and Assets Levels. Journal of Ethnic and Migration Studies, 29(1): 103-119 Clampet, S. (2003) ‘Finding and Keeping Affordable Housing: Analyzing the Experiences of Single-Mother Families in North Philadelphia’ Journal of Sociology & Social Welfare, 30(4): 123-132 Garino, G., Sarno, L. (2004). Speculative Bubbles in U.K. House Prices: Some New Evidence. Southern Economic Journal, 70(4): 777-792 Klobasa, J. (2006) Tips To Keep In Mind Before Investing In Real Estate, available at http://www.realestatearticlesdirect.com/articles/Article/Tips-To-Keep-In-Mind-Before-Investing-In-Real-Estate/7161 Knight Frank (2007) London Residential Review, available at http://www.knightfrank.com/ResearchReportDirPhase2/11039.pdf National Statistics Online (2007) Property transactions 1961-1999: Social Trends 31, available at http://www.statistics.gov.uk/StatBase/ssdataset.asp?vlnk=3629&Pos=3&ColRank=2&Rank=192 National Statistics Online (2007) Average dwelling prices: by type of buyer: Social Trends 33, available at http://www.statistics.gov.uk/StatBase/ssdataset.asp?vlnk=6438&Pos=2&ColRank=2&Rank=192 Pain, N., Westway, P. (1994). Housing, Consumption and Borrowing: An Assessment of Recent Personal Sector Behaviour in the UK. National Institute Economic Review, 149: 53-68 ShelterOffshore (2006) More UK Investors Buying Property Abroad, available at http://www.shelteroffshore.com/index.php/property/more/more_uk_investors_buying_property_abroad/ Weale, M. (2006). Commentary: The Housing Market and Government Policy. National Institute Economic Review, 195: 4-9 Williams, P. (2004). ‘The Continuing Crisis in Affordable Housing: Systemic Issues Requiring Systemic Solutions’ Fordham Urban Law Journal, 31(2): 413-427 Literature Review Generally, it could be stated that the property market is characterized by continuous and radical changes. The specific issue has been examined by Pain et al. (1994, 53) who noticed that ‘the behaviour of the personal sector has changed markedly over the past 15 years, coinciding with a period in which overall consumers expenditure proved extremely difficult to forecast with any degree of accuracy’. Because of the above phenomenon, the national economy – which is closely related with the property market - faces severe turbulences by achieving a significant level of growth when the prices of houses are increased and having severe losses in periods that the prices of houses are decreased because of the lack of monetary resources available that they could help the enhancement of the property market. In a relevant research published by National Statistics Online (2007) it was revealed that ‘a feature of home ownership in the United Kingdom is the relatively large number of homes purchased with a mortgage; approximately three quarters of house purchases are financed with a mortgage loan facility’. This means that consumers in Britain cannot afford the purchase of a new house and for this reason they seek for the support of the financial institutions. However, if taking into account the fact that borrowing cannot be increased on a continuous basis (such a fact could lead the national economy to severe damages) it is clear that the real potentials for growth are not many for the UK property market. On the other hand, property is often chosen by investors globally as a profitable solution especially for a long term investment. In this case, the funds gathered could be used in order to stabilize the economy. However, not all properties are offered for such a pay-back unless perhaps those that are cited in certain (usually too expensive, in terms of the price of the house/ building) areas. In other words, the support of the national economy would be not equal but it would be related with certain areas/ regions across the country. The specific issue was reviewed by Garino et al. (2004, 785) who noticed that ‘the return offered on alternative investments, such as equities, might be expected to be important in determining the behaviour of house prices; when the volatility of share prices is very high, for example, the returns on property become more attractive, possibly encouraging households to shift some of their money out of equities into real estate’. In the same context, Klobasa (2006) supported that ‘real estate investment is becoming increasingly popular because of its immense growth; though it may take some time, if property is correctly invested in, a good profit is ensured’. In other words, property can have a series of direct and indirect effects on national economy influencing all its aspects including the share prices. Because of the above phenomenon, investing in property is often considered as a ‘safe’ decision especially for funds that will be ‘controlled’ for a long term period – the purchase of property and its re-sale or its use as a source of income has been found to be more profitable for investors that are interested in long term investments. A problem that should be highlighted here is the fact that not all parts of the population can participate equally in the property market. A series of issues, like the race, the ethnicity and the income can influence the accessibility to the property market for many people. In this context, the financial weakness of people of various ethnicities has been a severe obstacle towards the acquisition of a property/ house. Towards this direction, Britton et al. (2003, 103) noticed that ‘although ethnic variation in income levels is worthy of attention, a focus on income alone cannot fully tap ethnically-based differences in economic wellbeing because it precludes consideration of other indicators of material wealth’. Moreover, Williams (2004, 416) supported that ‘the quality of housing available to low income people is generally substandard while a complaint frequently made about public housing units is that they are not well maintained by the local public housing authorities’. In other words, the role of public housing has been proved to be ineffective in the limitation of the housing problems of people of lower income. However, even in the above case the support offered by financial institutions can be valuable for people of low income. Indeed, the last 20 years financial institutions have entered dynamically in the property market by offering incentives for borrowing especially to people of lower income. The above fact is proved by the study of Pain et al. (1994, 53) in which it is stated that ‘borrowing by households rose rapidly in the 1980s, with the ratio of debt to personal disposable income doubling from 57 per cent at the end of 1980 to 116 per cent by 1990’. The financial strength of the people regarding the acquisition of property is decided on specific criteria. On this issue, it is noticed by Clampet (2003, 126) that ‘knowing the income and the composition of a household, one can calculate how much of that income must go toward "nonshelter" costs (food, clothing, etc.); after the minimum costs of these expenditures are taken into account, one is left with how much a family can afford for housing’. Under these terms, the most appropriate period in order to offer a particular property for sale should be chosen carefully. Regarding this issue it is noticed by Gibb et al. (2006, 277) that ‘the time to sale is a "duration" variable and hence subject to two crucial characteristics: time dependency and censoring: the first of these relates to the fact that the probability of sale in any given period may itself be contingent on the length of time a property has already been on the market; the second effect arises because some properties will be withdrawn from the market before sale or remain unsold at the time of analysis’. In other words, the level of prices in the property market can influence the national economy; however it is necessary that each specific property follows a series of standards when being offered for sale; if these standards are not met then the value of the property is normally expected to be decreased; if extended to a series of properties within a specific market this fact can influence the performance of the national economy (either directly or indirectly as described above). Because the development of property market is quite important for the national economy (under the terms mentioned already) it is necessary for the government to take all appropriate measures in order to ensure the stability of the property market in the long term. Referring to the policies followed by the British government regarding the property market, Weale (2006) supported that the main aspects of governmental initiatives regarding the support of the British property market are the following four: (i) maintaining a tax-favoured treatment, (ii) avoiding anything which might depress house prices, (iii) probably adjusting the inheritance threshold to protect the direct descendents of house owners from the collective burden on future generations created by high and rising house prices and (iv) hoping that house prices do not rise sharply in the future’ (Weale, 2006, 7). Other measures are also likely to be taken in accordance with the trends of the specific market at each specific period of time and the needs of the economy in the long term. It should be noticed that even in case that all appropriate measures for the support of property market are taken by the government there are times when the turbulences within this market cannot be avoided. Regarding this issue, and after reviewing the property market of London Knight Frank (2007) noticed that ‘2006 proved to be an extraordinary period for the central London residential market; the sector was upbeat throughout the entire year, with prices growing by 28.6% and rents by 6.8%’. Through the years, the development of property market in UK is expected to be further developed but it should be appropriately supported in order to avoid any unexpected turbulence in the national economy (caused by the potential radical decrease of prices of properties in the country). Part Three Dissertation objectives As stated above, current paper focuses on the identification and the evaluation of the role of property cycles on the British economy. In this context, the following issues will be presented and analyzed trying to identify the characteristics of the specific market and its potentials for the future: a) how the British economy is influenced by the property market (reference to recessions, interests and credit), b) how the property market could support the development of national economy, c) which is the role of the financial institutions? d) consumer behaviour related with the property market in UK and e) which are the prospects for the British property market in the future? Research methodology The research methodology used in current study can be ‘derived’ in two different parts: on the one hand the literature on the issue under examination will be used in order to support this study while the statistical data published by governmental and non governmental organizations are also considered as having a significant importance for the successful completion of this study. On the other hand, a survey will be conducted presenting the views of professionals on the property market and its potential prospects for the future. The survey will be based on a questionnaire which will be distributed to a series of firms operating in the industry (the 10 more powerful firms operating in the British property market) and will be evaluated afterwards using the views of the literature on the specific subject. Work plan The work will be based on an extensive research on the issue under examination. After preparing the proposal and designing the main directions of the project, the material of the study will be gathered trying to focus on the issues that are related with the subject under examination (evaluation of appropriateness of material). At a next stage, the material will be divided into categories and will be developed following the structure of the paper as suggested in the proposal. A review of the project after its completion is necessary in order to identify any possible weaknesses and proceed to the necessary adjustments/ corrections. Read More