Impact of Recession on UK Real Estate Market

SECTION1: INTRODUCTION1

SECTION 2: LITERATURE REVIEW2

SECTION 3: METHODOLOGY3

SECTION 4: DISCUSSION OF FINDINGS3

Residential Property Market3

Commercial Real Estate4

SECTION 5: CONCLUSION5

References8

Impact of Recession on UK Real Estate Market

SECTION1: INTRODUCTION

After the collapse of the sub-prime mortgage market in US, the financial markets in every part of the world suffered. The results were widespread and were also seen on a range of investment firms and banks which were exposed more to the risky securities and debt products. It has been stated that the losses incurred from the sub-prime mortgage are almost $400 billion (Pennington-Cross 2002, pp. 45). Not only financial losses occurred but the loss of confidence also happened as there was the lack of transparencies in the credit markets. So the interest of the asset backed securities decreased significantly, and the riskiness of debt package appraised sharply.

Sub-prime mortgage is also termed as the credit crunch and indicates the deeply rooted conditions that produced the crises. The causes of the credit crunch are attached with the deregulation of financial markets in US in 1970 after which Asset backed securities and Collateralised Debt Obligations were invented as innovative financial structures. But both ABS and CDO needed a loan product to produce higher incomes. In this regard, continuous demand was also the key driver due to which standards of lending declined sharply. Banks and asset management firms were holding many bonds and securities which were backed by the sub-prime mortgages (Raju & Maniam 2009, pp. 212). Thus, these financial services were adversely affected by the credit crunch. So serious weaknesses were revealed indicating the issues in debt structuring. It was also found that the risk assessments were not accurately made in case of these leverages. The purpose of these weaknesses was the complex structure of the products delivered by investors which was far different from the actual asset structure. So the reasons of financial crises were apparent after a longer time period. It was also noted by several international and national organizations such as IMF and Bank of England that the risks associated with the securitized products offered are very high and thus should be seriously considered by the investors (Sanders 2008, pp. 259). At that period of time, the risk of steep fall in the housing prices was also indicated. It is because the securitization was based on the assumption that property markets prices will rise in case of the squeezed borrowings (Haffner 2008, pp. 339). The free fall in the real estate business particularly residential one emerged in August 2007 as the property values plummeted along with soared default rates. This reduced the worthiness of the asset backed securities much more than anticipated.

The aftershocks of the credit crunch in UK also affected the financial sector especially the leveraged buy-out activity and structured credit products. Also, the effect was made on the equity markets making it weaker. It was revealed in the PwC survey that the volumes of business of financial services, employment expectations and optimism towards real estate properties also ...