European House Price - Essay Example

A Research on the European House Price The project deals in the trends in the house prices in the European market. The main focus of the project is the effect of recession on the house prices of Europe. The report tries to list all the findings regarding the house prices before and after the recession. The report takes into account the trends in most of the countries with more emphasis being given to UK. The project is based on the literature review and from the findings of the review, the conclusions and the recommendations will be drawn. Introduction Purpose The purpose of the paper is to find the effect of the house prices in the recession across the continent of Europe. Recession had its base in the US and was caused by the excessive housing boom. It had widespread effect all over the world. The paper is dedicated to finding the effect on the European real estate market. Introduction to the topic The recent recession had its base in the housing market of the USA. The banks offered loans to subprime group of people at a higher interest rate. When the time came for the repayment of the loans, they defaulted and the banks were left with a huge stock of houses and unpaid loans. The banks had sold of the loans as debt instruments to the financial companies of the world. Naturally, when the payment was not made there was a cascading effect, which took down many companies of the world. The European house market was also affected by the recession and the companies were affected there too. The Banks of the European countries followed the same structure in providing loans to public for housing purposes. The Government of most of the European countries was left with a number of houses at their disposal. This resulted in the decline in prices of the houses, as there was a disparity between the supply and demand. Moreover, in the wake of the recession, there was a huge job cut in all industries and the rules of the banks became more stringent. In the anticipation of this kind of situation, the prices of the houses decreased further. Among the European countries, Germany is the only place where overvaluation has not been reported. Countries like Ireland, Finland etc are also troubled by the supply of new houses. ( Conrady, 2010; Pp 41-43). Structure report The paper deals in the literature review of the topic, the methodology of the findings and the conclusions and recommendations. In the wake of the recession, the subject of the house prices has assumed great significance as it was the focal point of the financial disaster. Aims and objectives The paper deals in stating that the recession affected the house prices negatively in the continent of Europe. The paper will list the findings and draw upon a conclusion. To find the answer to the question the paper takes up a detailed research on the effects the recession had on the house prices across the continents of Europe and the future of the house market. Literature Review The recession, which took shape in the USA in 2008, shook the whole world. The European economy followed the same principles like that of the US. The banks in Germany, the biggest economy in the European zone, offered loans to subprime people much like that of the US and suffered the consequences. The subprime people were unable to pay the loans and the economy was engulfed in recession. (The China Post, 17th March, 2008; Eicher, Mutti &Turnovsky,2009; pp 463-466). The recession had a tremendous effect on the European economy as a whole. The inflation culminated to a record high and the global turmoil resulted in the loss of jobs and closure of organizations. During the second quarter of 2008, the growth of the European economy contracted to 0.2%, which is the worst in the history after the EU was created. This was in sharp contrast to the first quarter of the year when the European economy had a growth rate of 0.7%. Why did the economy suffer such a setback? This was mainly due to the bad performance of Germany whose economy suffered for the first time in four years. England experienced rise in the inflation rate and slow growth of the economy. In fact, all the countries over the continent of Europe were plagued by the problem of inflation and low economic growth. The banks stressed on the fact that fighting inflation is their main agenda, which will help in recovering the economy. (Recession stalks Europe as economy as economy shrinks, 18th August, 2008). The International Monetary Fund (IMF) had predicted after the housing bubble burst in the US that the condition in the Europe is far from satisfactory. The body had predicted slow growth in the economy and rise in the inflation. The problem of slow growth will not only be visible in the Europe and the US but the trend will be a worldwide affair. The body also noted that the prices of the houses in the UK are overvalued by 20% to 30%. The correction of the prices will follow a general pattern and will take several years. (O’Grady, 9th October, 2008). The effect of the recession was severe in the case of the UK. The Ernst and Young predicted that the UK property prices would suffer a slump in the prices in the subsequent years. It was at the peak in 2007 and in contrast to the prices in 2007, the house prices decreased by 14% at the end of 2008 and it was projected to decrease further by 10%. The features in the recession were unemployment, tightening of banking regulations and low house prices. These features affected the confidence of the public. The asking price of the house fell by 4.9% from a year earlier. (UK in recession as average property prices see steepest decline in six years, 20th October, 2008). The housing sector was the most affected sector in the industry in this recession. The banking system collapsed and with it, the real estate industry as this industry was one of the premier users of bank debt. The Real estate sector suffered a general dip in the general business cycles. However, this type of dip is common in the real estate cycles. The factor, which has led to the decline of the housing industry, is the stringent regulations of the banks in terms of loans. The loans from the market vanished and the Government increased its control measures on the banks. The equity market suffered a slump and investors took out money in a hurry. The general trend was the decrease in the house prices as supply of the houses outgrew the demand. (Emerging trends in real estate Europe, 2009) One of the most developed housing markets in the pre-recession period was that of Finland. Driven by the high economic growth and favorable tax system, the housing industry in Finland saw a boom period from the year 2001 to the 2nd quarter of 2008. Due to the nature of Finland’s economy, it is affected by any significant global economic happenings and the recession was no exception. The house prices were affected by a substantial amount in Helsinki, the country’s capital. The prices fell by 7.5% from the previous year. The fall in the prices was due to the severe credit crunch. The banks hiked the repo rates to 4.25%, which affected the availability of loans in the market. Thus, the demand for the housing decreased. (Recession and deflation: risks for Finland, 13th August, 2009). According to the estimates made by Standard & Poor’s (S&P), the prices of the houses would need substantial amount of time for correction. The prices in the property market are on a downward spree and every country in the region is experiencing fall in the house prices. The effect of this recession is harsher compared to the previous ones and as it is caused by the excessive debts taken in the real estate industry, the industry would take time to recover. It has been seen that the countries, which are more leveraged, are suffering more in this downturn. (European house prices reel from recession: S&P, 24th June, 2009) The UK economy received loads of money from the Government to face the effects of recession. This major thrust in the economy is bound to affect the balance in the days to come. The interest rates offered by the banks were at an unprecedented high of 15% but fell to only 3.5% during the economic downturn of the economy. To attain equilibrium in the market will require time. In the UK, the house prices have come down by 4.5% and the lending rates of the bank have been set at a high rate. This has been done to put off the interested people to buy new properties. The economy is cautious and does not want to enter the trap of vicious lending cycle, which was the main cause of the recession. It is a fact that the decrease in the house prices leads to decrease in the household spending which is one of the major sources of spending in the economy. The decreased in spending has a cyclical effect with increased unemployment and the loss of business for the organizations around the world. This was the trend in the earlier recession of the 1990s. The banks, which now have a high interest rate, will have to work overtime to bail out the economy. The rate of interest has to come down to encourage spending in the economy. However, there is a point in decreasing the rates. It has been observed from the history that the inflation rises two years after the peak in the house prices. Therefore, the Government cannot decrease the rates if they want to as during the inflation the currency is bound to weaken. (Ferguson, 4th November, 2005; Jolly,2003; Pp 127-128) Reports published by the Deutsche Bank suggest that the house price trends in Europe will need time to stabilize. It can be said that the house prices will stabilize at 2010 hopefully. The UK market follows the trend in the US where the house prices will decline further. (Rascoff, 15th July, 2008). However, reports in the UK markets suggest that the economy in the UK is fast recovering grounds. The house prices rose by about 7% than in 2009. However, the enquiries made by the buyers fell to a certain extent. The mortgage market is also easing though there is a huge gap between the demand and supply of the houses. In 2009, the property dealers held back the houses in anticipation of the rise in prices. At that time, the demand for the houses outstripped the supply. However, in the present year with the easing of the market, the supply has increased but the demand has fallen with the rise in the prices. This will lead to a stage of inflation in the days to come. (Lambert, 25th February, 2010). However, there has been a cautious approach in the European property market overall. The general trend is optimistic, but the investors are trading a cautious approach. The market has somewhat stabilized with the decline in the prices less than that of the previous years. The general market sensibility has eased giving rise to free credit. However, the companies are expecting a growth path, which is sluggish and fragile. The unemployment trends will be high and the consumer spending will be low. According to the ULI Europe Chairman, Alexander Otto, “Europe’s economic recovery is underway, but it will be sluggish and uneven.” (Emerging trends report: long haul ahead for European real estate, 1st February, 2010). The economic recovery in the continent is weak and is helped immensely by the Governments of the respective countries. The Governments pumped in loads of money into the economy, which enabled the banks to put aside the debts. A big pie of the loans that were dished out by the banks before the recession is coming to maturity over the next four years and the banks are extra cautious over this. The business houses are diligent over their deals for this reason and there is general apprehension over the measures taken by the banks in the case of the loans. Many are of view that the banks will offload the loans, which will push down the property prices. The investment in this sector is low for this reason. The recovery will be slow with no quick benefits for the property dealers. The institutional loans will come into play, as the banks will tighten the measures to offer cash in the industry. The interest rates will remain low in the days to come which makes the probability of inflation more likely. (Emerging trends in real estate Europe, 2010;pp 1-10). The recent trend in the splurge of the house prices in the European market was helped by the strengthening of the stock market. Historical evidences show that the real estate prices and the stock prices follow the same path. The mood in the market is generally upbeat and the prices in the real estate market are generally on the higher side. (Pokhlebkin, 4th June, 2009). Through the above paragraphs, we have seen that prices of the European real estate market came crushing down during the recession from an all time high. The market is on a restructuring phase and the real estate market has grown to some extent in the current year. The growth will be slow with the general perception of the investors being susceptible due to the measures of the Government. Methodology Introduction The reliability of the findings of the study depends on the methods of the research. The method of the research depends on the subject, period of the study, aims of the research and its objectives. In this case, the findings are primarily based on the continent overall with special impetus being given to UK as the economy there was the most effected due to recession. The general approach followed in this paper is to find the housing price trends before and after the recession. The qualitative method focuses on the subjective view of the participants while the quantitative method deals in analyzing the given datasets. The data collected will be quantitative in nature but in some cases, qualitative analysis will be followed. Therefore, the method to be followed in this paper should be “mixed method” approach. Methods The method followed in this paper will be of “mixed approach” combining the qualitative and quantitative techniques. There will be interviews conducted and the subjective view expressed by the interviewees will consist of the qualitative analysis. The analysis of the contents of the concerned writings will also be a part of the qualitative analysis. Apart from the qualitative analysis, the paper will also employ quantitative analysis. The research will be based on data collection from various sources and analyzing the effect through statistical methods. The use of time series analysis and the analysis of the data with the help of regression techniques will be useful in the original paper. The data will be used in the construction of charts and trend lines, which will make the understanding of the subject simpler. (Carvalho & White, n.d. Pp 1-4). The research will be based on a mixture of primary and the secondary data. There will be interviews conducted on the property dealers on the subject. The process of interview will be face to face or through questionnaires supplied through emails. They will be questioned on the trend of prices before and after recession and the general impact of the recession on the demand of property market. This type of primary research will be helpful in finding out the impact of the recession on the property prices. Besides the primary research, secondary research will be conducted through the articles based on the subject. The secondary research will be helpful in the preparation of the report through the collection of data, news and views about the subject. The articles will be taken from the websites relating to the property prices like independent.co.uk, globalpropertyguide, propertywire, moneyweek etc. These websites will provide a clear picture on the trend of prices before and after the recession and the reasons for it. Sampling A sample size of 50-75 dealers will be taken to know about the trend in the change in the prices before and after the recession. The dealers will be based on UK and will be selected on a random basis. The dealers will be interviewed directly or by questionnaires sent through emails. The response of the dealers is important to the research as they had been in the market and seen the trend of the prices very closely. Limitations The sample of the research will be based in UK. The views expressed by the dealers may not be a general reflection of the effects of recession in the whole continent. The sample size is small and it may not reflect fully the perception of the dealers. The dealers will be selected on a random basis, which may also create problem because some dealers may be more influential than the others in the market and unconsciously there might be a bias towards the more prominent dealers. Findings and Results Primary findings The findings from the literature review points out that the economy is correcting itself after the slump in the real estate prices during recession. The correction of the economy will take time as the general perception of the public and the business houses are cautious. The banks have eased the regulation on the economy and money is starting to flow in the capital market again. However, the loans, which were issued by the banks before the recession, will come up for payment in the days to come, which can take the economy further down. Relevant data During recession, all the major markets in Europe saw decreasing price trends. The decrease of prices was severe in the first part of 2009. The whole of the European region saw a decrease in the prices of up to 5.1%. The trend started in the last quarter of 2008, when the recession was taking shape. At the start of 2009, the UK market was the most affected with a 17.2% decrease in the prices. Ireland followed suite with a decrease of 9.9%. However, some countries like Switzerland did exceedingly well to tackle the recession. The prices of the property increased in the country by 5.3% in March. The situation in Switzerland was an exception. The major market of UK suffered a slump in the house prices over the year. (Lambert, 7th July, 2009). Thus, the prices of the property fell all over the continent with the exception of one or two countries. This was due to the stringent measures enforced by the banks in providing loans and the general susceptibility of the public. The trend in the falling prices and the reasons for the fall will be discussed in detail in the original paper with the help of graphs and charts. In this paper, we will discuss the tentative findings in the effect of the house prices. In the year 2009, most of the countries were hit by the global crisis and they experienced a dip in the property prices. In the last quarter of 2009, the traits of recovery were visible. However, certain countries are still plagued by the crisis and the prices continue to fall. The trend is visible in the Baltic country of Latvia where prices fell by 53%. The other Baltic States followed a similar trend with Estonia and Lithuania saw a dip in prices of 30% and 27% respectively. The Scandinavian countries were not affected much by the global downturn of the economy. Norway, Finland and Sweden all recovered well and reported positive rise in the real estate prices. The last quarter was significant in the market of UK, which reported an increase of 1% in the house prices. Spain reported a 10% decrease in the prices and the trend was similar in the countries of Cyprus and Ireland. The relatively strong economy of Germany and Netherlands saw a relatively low fall ranging from 4% to 6%. (Jones, 2nd March, 2010). Data presentation The above chart shows the percentage change in house prices in some of the countries in Europe. It can be seen that most of the countries in question had negative changes in house prices. Summary The global downturn in the economy had an effect over the whole continent of Europe. The recession was caused by some policies of the banks and as a result, the banks made the rules for getting loans more stringent. The credit was not available freely in the market and the demand for houses fell drastically. This resulted in the decrease of the house prices. However, stronger economies faced the situation admirable well and some countries continued to show slow increase of prices. This had much to do with the presence of important economic centers in those countries. An example in this regard can be London in the UK. These points were found in the review of the literatures used in this paper. The primary findings through the literature review shows that the prices in the property market dipped in the wake of the recession. It is expected that the primary and secondary surveys, which will be conducted for the research, will be in accordance with the primary findings. Discussion Interpretation of the findings From the literature review, it is inferred that the recession had a wide impact in the house prices of Europe. With the banks implying stringent rules and regulations regarding the availability of the loans the demand for the houses fell. The investors moved away from the market with the drop in prices. The market was further hit by the sentiments of the sellers and dealers who held back the property with the anticipation of price hike in the future. However, the markets began to stabilize from the last quarter of 2009 with investments being made in the economy. The capital market stabilized and reported a rise. The growth is slow and it will take time for the market to come in the position of the past. The condition of the market was expected as the global economic downturn had its base in the property market in the US. It had widespread implications in the global market. The banks offered loans to the subprime borrowers, extended the loans in the form of debt instruments, and sold it to the financial institutions of the world. The European banks followed the operations of the US banks and faced crisis when the debts came up for payments. The organizations around the world faced severe credit crunch and looked to downsize their operations. The economy was hit by unemployment crisis. The general demand for the houses fell and with the increase in the interest rates for the home loans, the supply was far greater than the demand. The findings are in accord with the literature review, which states the general conditions of the housing market in the whole of Europe. The prices were sky-high in the years prior to the recession. However, during the recession the prices in the property market dipped. At the aftermath of the recession, the prices continued to dip. It was only in the last quarter of 2009 that the market began to stabilize and the house prices began to rise. (Tsenkova, 2009, Pp-132-136) Conclusions & Recommendations Conclusions based on evidence The housing market in Europe was severely hit by the recession and the prices in the real estate market dipped. The banks opted to imply more stringent rules and regulations for the availability of the loans, which made matter worse for the housing market. The interest rates were lowered and the Government of different countries pumped in a lot of money. The housing market stabilized and some countries reported in the rise in prices. The debts of the banks have been taken over by the Government and subsequently the Real Estate market, which was reeling under the pressure of the credit crunch, survived. A strong economy like Germany saw the same trend where the Government bailed out the banks.(Hugh, 18th January, 2009). Central Banks all over Europe lowered the interest rates to bring the flow back in the economy. The European Central Bank lowered the interest rates by 75 basis points and the Bank of England lowered the rates by 2%. This decrease of the rates is unprecedented in the banking history of Europe. Talks are going on to bring the interest rates down to close to zero. This trend is visible all over the world with all the major banks cutting their rates.(Sils, 4th December, 2008). The efforts made by the Government and banks underline the fact that the recession had a disastrous effect on the house prices. The property prices dipped in almost all the countries of Europe and this was due to the widespread credit crunch during recession. Recommendation and action plan The efforts by the Government are to help the economy to withstand the pressure of the recession. However, the measures adopted by the Governments and the banks appear a little hastened. After the Government subsidy stops, where will the economy head for? Moreover, the loans are up for payment in four years time and the banks will face more pressure then. The economy will again plunge into recession. The economy should have been left alone to revive following the general trends in the economy. With the lowering of the interest rates, the currency weakens and the economy will fall in the inflation. Therefore, the recommendation would be less interference by the Government in the field of subsidies and interest cuts. References: 1. The China Post.(17th March, 2008). World bank chief sees U.S. recession risk, Europe turmoil. Available at: http://www.chinapost.com.tw/business/europe/2008/03/17/147436/World-Bank.htm (Accessed on 3rd March, 2010) 2. Recession stalks Europe as economy shrinks. (18th August, 2008). EU business. Available at: http://www.eubusiness.com/news-eu/1218705421.32 (Accessed on 3rd March, 2010) 3. O’Grady,S.(9th October, 2008). IMF predicts UK recession and house price falls up to 30%. The Independent. 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