Business Economics - British Housing Market, Property Market Challenges in the UK - Literature review Example

BUSINESS ECONOMICS AS: BRITISH HOUSING MARKET Client Insert Name Client Insert Course Client Insert Institution Client Insert Due Date of Assignment Business Economics AS: British Housing Market One of the most fundamental needs driving global economies today is property ownership. Modern times have seen people becoming increasingly interested in owning properties as a way of securing their futures and posterity. With particular reference to the UK market, property market has become a key industry in the country’s economic development in terms of Gross Domestic Product (GDP) in recent times. Increased obsession with property ownership among the citizenry has created what has been described by Wallison (2014) as a ‘pyramid scheme’ within the housing industry with different challenges and risks for those caught up in the frenzy. This explains the reason why over the last three decades the property (and particularly the housing) industry in the UK has developed deep-seated complexities and problems that have griped the whole nation with ripple effects observable throughout the whole economy. This critical review paper discusses the question of property ownership in the UK with the view of discussing the microeconomic and macroeconomic factors that best explain the problems that permeate the whole industry. The State of the UK Housing Market Today In order to properly place into context the problems permeating the UK housing market today, it is appropriate to present an overview of the state of the industry today. According to Wallison (2014), the UK housing market is constituted by four distinguishable forms of ownership (Wallison 2014): 1. Privately owned property – where people own and occupy apartments privately as their own; 2. Privately rented property – where people rent property for a definitive time period; 3. Local authority rented property – where different local authorities rent property on behalf of their employees; 4. Property managed and owned by housing associations – where housing associations acquire and own property on behalf of their clients. According to records in the early 20th century, a mere 10% of all homes in the UK were owner-occupied and over the past century, this figure has increased dramatically to over 70% of properties in the UK today being owner-occupied (Krainer & Wei 2004). In fact, by the end of 2010 Fiscal Year, statistics shows that there were 21 million owner-occupied households in the UK alone (White 2015). This rate is slightly above the European Union average of 65% which is still significantly remarkable compared to how things were a century ago (White 2015). From this brief statistical evidence, it is clear that owning property in the UK has become among the top priorities for the general public and inasmuch as this has been considered a positive development in the economic development of the country, there have been many problems that have been occasioned by it. It is because of these problems that the Governor of the Bank of England observed that, “The British housing market has deep, deep, problems and the current rising house prices represent the biggest current risk to the economy” (White 2015, p. 34). Property Market Challenges in the UK The challenges within the UK property market are influenced by both the policy framework dictating economic development of the industry as well as the consumer preferences and behaviors observed among the UK general public in relation to property ownership (White 2015). In a word, both microeconomic (referring to the economy of consumers, households, and individual institutions) and macroeconomic (referring to the overall working of the national economy) environment has worked towards influencing the challenges within the housing industry in the UK market. Macroeconomic environment changes that largely contribute to these changes are associated with the complexity of financial products developed for the UK market. Recent lending trends are based on speculative income for traders leading to increased securitization of assets which are the reason for the fluctuating prices within the property market in the UK. Securitization based on asset-backed debt for banks enables assets to be used to generate a regular income flow which provides liquid income used to purchase homes. This factor in addition to policy formulation structures such as George Osborne’s New Help-to-Buy ISAS seeking to add £3,000 gratis for first time buyers to encourage them to own property rather than rent out complicate the stability of the market in the long run. At the center of this policy framework is the argument that it is ineffective and wasteful to subsidize the rent for the poor via housing benefits. In its stead, it is liberating to subsidize ownership costs for middle-income earners by over a billion pounds through the ISAS Scheme (Talbott 2003, p. 56). The effect of such policies is that they increase the frenzied rush for property ownership with the general public has developing a level of obsession pushing them to greater risky financial investment practices in the property market (Hinsliff 2015). In the words of Hinsliff, this acceptance of crazed property prices has simply sucked first-time buyers into some sort of a Pyramid Scheme as the level of negative equity that they end up being suscepted to in the event of an economic crash becomes completely debasing for them (Talbott 2003, p. 54). The government policy framework in this industry fuels demand for something that is in acute limited supply in the process overseeing unprecedented price increases in the property market. In fact, it is estimated that 14400 fewer homes than are required are being built every year in the UK. In addition to this reality, the government has also loosened its grip on regulation of property developers. For instance, investors can easily knock up an estate in the locality within a couple of weeks to house a couple hundreds of citizens but the extra infrastructure required to serve the new inhabitants – such as school facilities, health centers and transport links – takes a couple of years to be built, if they are ever built! This presents a grave problem that does not only concern property ownership market but the safety and convenience of the general public as well. According to Talbott (2003), the problem of skyrocketing property prices is not merely a consequence of the decade-long failure to sufficiently built properties commensurate with the demand in the market; there is also the issue of speculative foreign money, city bonuses, first timers competing with buy-to-let landlords among others. All of these have caused a level of uncertainty within the UK property market leading to the US-Housing-Bubble-like-effect that precipitated into the 2008 Global Economic Crunch that nearly brought global economy to its knees. The corollary effect of these macroeconomic dynamics within the UK housing market is stirring up panic purchases and creating false supply leading to unprecedented high demand for property ownership. According to Talbott (2003), every young person in the UK after graduating from college is obsessed with the need to own property and the financial schemes that the government and money lending institutions provide are all perceived to be the most appropriate way of owning property, albeit wrongly. This is because of the existence of a perceived economic boom sustained by property wealth in the UK market. In the long run, these developments have deleterious effects to the overall economy of the country while at the same time placing a lot of unstable first time owners of property at an incredible risk of bankruptcy and unforeseen financial struggles in the event of another major economic crunch of a regional scale (Hinsliff 2015). These policies do not only affect the young and first timers in the property ownership business. Statistics also indicate that they also affect the old and the retired. This section of the public continue pouring their pension money into property as the perceived demand created by various pension and loaning schemes continue demanding fresh-faced entrants coming in at the bottom so as to continue delivering returns at the top of the whole property pyramid (Hinsliff 2015). With this approach to the property business, Hinsliff (2015) provides the most succinct way of rationalizing why the deep seated problems of the industry continue expanding their roots and taking shape not only in the UK but also expanding to other European areas in the vicinity. She says, “With no new buyers, there are no more sellers, which means there is no pressing reason all of a sudden to pay up the billions of pounds locked away in asset financing bubble through lending institutions and mortgages” (Hinsliff 2015, p. 1). This certainly leads to an increase in the cost of construction and restriction in the lending practices which effectively leads to increased costs of housing within the whole country. In turn, this affects the economic development initiatives as they have to be tailored to meet the ever expanding demand for the scanty property, a notion that has been caused by both the complexities arising from the policies being enacted (the macroeconomic environment) and the consumer behavior and institutional reforms (the microeconomic environment) characterizing the complex UK economy. Bibliography Hinsliff, G. (2015) “Britain's Obsession with Ownership has Turned Housing into a Pyramid Scheme”. The Guardian. [Online] http://www.theguardian.com/commentisfree/2015/mar/19/britain-obsession-ownership- housing-pyramid-scheme. Accessed on 26 March 2015. Krainer, J. & Wei, C. (2004) "House Prices and Fundamental Value". Federal Reserve Bank of San Francisco. Talbott, J. (2003) The Coming Crash in the Housing Market. New York: McGraw-Hill, Inc. Wallison, P. (2014) “The Bubble is Back.” The New York Times, p. A15. White, A. (2015) “Could Deflation Wreak Havoc in the Housing Market?” The Telegraph. [Online] http://www.telegraph.co.uk/finance/property/11492192/Could-deflation-wreak- havoc-in-the-housing-market.html Accessed on 26 March 2015. Read More