The Impact of Economic Crisis on the Property Industry in the United States - Research Paper Example

 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.

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 destocking 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 and ILO,2009).

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. 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 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. 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. That the CRE loans granted by the banks are more saturated the construction area than the loans for housing.

Since the construction retardations are much more severe and longer imbalances may get accumulated further and the loan recipients in the CRE segment do not own the same deterrence to default as the borrowers in the home mortgaging have. 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 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.

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 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 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 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. University of Ulster. The Global Financial Crisis: Impact on Property Markets in the UK and Ireland. March, 2009: University of Ulster Real Estate Initiative. 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.