Northern Ireland, a problem child

Graph 1 - Source: ONS (2011) & Nationwide (2013)

Up to 2009, housing prices were still declining within Northern Ireland according to Graph 1, while gross disposable household income was gradually beginning to recover. Attanasio et al. (2009) discovered that consumption should correlate with movement in house prices; however it was found that during a boom and briefly following a bust, they will deviate away from each other.

Up to 2009, housing prices were still declining within Northern Ireland according to Graph 1, while gross disposable household income was gradually beginning to recover. Attanasio et al. (2009) discovered that consumption should correlate with movement in house prices; however it was found that during a boom and briefly following a bust, they will deviate away from each other.

Graph 2 - Source: Nationwide (2013)

Graph 2 presents the status of the UK house market on a regional basis. Northern Ireland has quite a prominent difference in comparison to the UK average and other regions which have followed a similar line to the UK. Norwood (2008) cites that house prices leading up to 2008 had grown around 160% over five years, three times the rest of the UK. Combining the crash in house prices and low economic growth across the UK, Northern Ireland felt a multiplier effect with construction of affordable social housing almost halted and soaring unemployment. An economist from the Bank of Ireland, cited by Norwood (2008) said that the market was “stricken with relative inactivity uncertainty and nervousness over valuations"

However there was a silver lining out of this. First time buyers rejoiced as the housing bubble burst, with property values dropping and interest rates at record level lows housing affordability was once again in the grasps of the first time buyer.

In their study, McGreal, Brown & Adair (2010) targeted the Belfast Metropolitan area to decipher the factors that caused such a massive collapse of the housing market. They identified that the key driving force for the expansion of the bubble or at least the foundations for it, was the growth of income, very low unemployment, low interest rates and strong macro-economic influences from the UK accompanied by cross border investment relations with the Republic of Ireland.

McGreal, Brown & Adair (2010) results demonstrate the deviation from the asking price of houses and the actual sale value which I have attached, as Appendix 1 & 2. From these results they were able to pinpoint when the bubble was vigorously expanding as the both the asking and the sale value prices shared similar tracking during normal market conditions while during a bubble values where higher and more varied.

Attanasio, O.P., Blow, L., Hamilton, R. And Leicester, A., 2009. Booms and Busts: Consumption, House Prices and Expectations. Economics, 76(301), pp. 20-50.

McGreal, S., Brown, L., & Adair, A. (2010). List price and sale price variation across the housing market cycle. International Journal of Housing Markets and Analysis, 3(2), 89-99. doi: http://dx.doi.org/10.1108/17538271011049731

Nationwide, 2013. Housing Price Index (HPI). 1. England: Nationwide.

Norwood, G 2008, 'PRICES HEAD DOWNHILL', Estates Gazette, 820, pp. 99-101, Business Source Premier, EBSCOhost, viewed 28 February 2013.

Office of National Statistics, 2011. Regional Gross Disposable Household Income (GDHI) 1995-2009. 3. England: Office of National Statistics.

Appendix 1 - List Price vs Sale Price 

Appendix 2 - Standard deviation between list price and sale price

UK Regional Analysis

Source: Nationwide Statistics & Office of National Statistics

This graph displays the relationship between the UK and its sub-regions, except Wales which follows an almost identical path to Scotland, in terms of house values in comparison to movements in GDP within the UK.

Looking at these statistics, it’s apparent that there is a significant difference between not only the value of houses across the UK, but the rate at which they fell and recovered, notably London which enjoyed a very quick recovery, while Northern Ireland still recedes.

Northern Ireland and Scotland are both under performers in comparison to the rest of the UK according to these figures, but on a sub-regional level how does this differ?

With the term, mini economies, being used to describe certain areas such as Aberdeen and London, which barely noticed the effect of the recession according to GVA values, it is hard to pin point the exact effect on housing because not enough sub-regional data is available to determine such an impact. However, going by the GVA it is believed that Aberdeen can attribute its success down to special circumstances according to Hacker Young (2012) who believe it is due to the exposure to the oil and gas industry, much like London is to the financial industry.

Rank	Town/City	GVA 2008	GVA 2009	Change
		(£ per head)	(£ per head)	%
1	Aberdeen	28,422	28,731	1.09%
2	Edinburgh	35,134	34,950	-0.52%
3	London	34,964	34,779	-0.53%
31	Belfast	30,819	29,816	-3.25%
	UK Average	20,911	20,341	-2.73%

Source: Hacker Young, 2012

However both Madsen (2012) and Valadez (2010) highlight that there should be a correlation between GDP and HPI or so it was within the US, it doesn’t appear to be the case with the UK, or possibly it is due to the special circumstance of the recession.

References:

Hacker Young. (2012). Aberdeen Only UK City to Create More Wealth This Year. Available: http://www.uhy-uk.com/resources/news/aberdeen-only-uk-city-to-create-more-wealth-this-year/. Last accessed 26 Feb 2013.

Madsen, JB 2012, 'A behavioral model of house prices', Journal Of Economic Behavior & Organization, 82, 1, pp. 21-38, Business Source Premier, EBSCOhost, viewed 26 February 2013

Nationwide (2012) UK House Prices Adjusted for Inflation, London: Nationwide Statistics.

Nationwide (2012) UK Monthly Indices (Post '91), London: Nationwide Statistics.

Office of National Statistics (2013) UK GDP since 1948, London: Office of National Statistics.

Valadez, RM 2010, 'The housing bubble and the GDP: a correlation perspective', Journal Of Case Research In Business & Economics, 3, pp. 1-18, Business Source Premier, EBSCOhost, viewed 21 February 2013.

Wild West of Mortgage Loans

Senator Schumer of New York said "the subprime market is the Wild West of mortgage loans" (Buttimer, 2011), an adequate euphemism I quite like.  You can see from this graph from S&P/Case Shiller HPI, the US housing market suffered a devastating blow when the subprime market collapsed. As I’m sure your aware this landslide was the dominating factor leading to the global recession. Much like the UK, the US market felt the effects of upward moving mortgage interest rates and downward shifting house values. However, unlike in the UK, US citizens can simply walk away from their debt with great ease. By popping the keys through the letter box of the house it was no longer the resident’s responsibility in other words relinquished ownership of said house, leaving the mortgage provider to foot the bill so to speak.

But how does it all tie in? To cite Schnabl & Hoffmann (2008) “The US subprime market crisis is shattering the world financial system.” But what did they mean? When the US housing bubble burst, it caused securities tied to US mortgages, or Mortgage Backed Securities (MBS), to crash which in turn had repercussions on financial institutions across the world. This was the catalyst for the economic contractions have seen ex post of the crash.

Buttimer, R.J. 2011, "The financial crisis: imperfect markets and imperfect regulation", Journal of Financial Economic Policy,vol. 3, no. 1, pp. 12-32.

Schnabl, G, & Hoffmann, A 2008, 'Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View', World Economy, 31, 9, pp. 1226-1252, Business 

Source Premier, EBSCOhost, viewed 24 February 2013.

Standard & Poors (2013) S&P/Case-Shiller Home Price Indices. [press release] January 29, 2013

Catch 22

Upon collapsing the housing market was caught in a “debilitating scissor effect” (Schwartz & Seabrooke 2009) that amplified its vulnerabilities to the financial contamination emanating from the banks. The truth hurt, as banks came clean about their exposure to the property market; the real mess because to appear on the balance sheets.

As banks lost further confidence in one and other, interbank credit markets became waste lands, no one was willing to step in and lend to anyone. Borrowing became more expensive because of lack of supply, and this meant mortgages rates soared.

Homeowners found themselves in a catch 22 scenario, with a house that was rapidly losing its value, and a mortgage debt that was ever growing, they couldn't justify selling but they also couldn't afford to keep it. In effect this trapped them in a spiral of having to use more and more of their take home pay simply to meet the repayment schedule of a house that is destroying their accumulated asset wealth as its price.

Schwartz, M & Seabrooke L. (2009). Boom and Crash: The Politics of Individual Subject Creation in the Most Recent British House Price Bubble. In: Shaw, T The Politics of Housing Booms and Busts. England: Palgrave Macmillan. 52-75.

A house of cards...

The housing market was built like a house of cards, in the UK, the US and across the globe housing markets collapsed in just a blink of an eye but we know that.

It is easy to be wise after an event, but hindsight did suggest that there were indication of an accident waiting to happen. The interbank lending market had dried up due to fears of bad debt which might have been lurking on banks’ balance sheets without anyone really knowing. Over lending was considered acceptable because it enable access to a market which was ever expanding. This was the first inclination that there was a bubble. Labour encouraged home owners to see their home as a financial asset. Unfortunately, as Labours mistake, they were tied to the collapse.  This statement acted as a catalyst that portraying housing prices as assets which are susceptible to speculative and support from the market.
Schiller, 2000, states that “a bubble implies a purely speculative price phase in which the psychology of crowds allows individual investors to overvalue systematically a particular asset or group of assets.”

Schiller has a valid point in that applying his thought, there was social significance attached to living in the “right” place and being able to afford a more expensive property, thereby fixing your place in society because “mines worth more” or something along those lines at least. The integration of the housing market into the welfare model & social investment norms was the most important facet of the house price bubble according to Schwartz and Seabrooke (2009)

As the welfare model developed, family homes were considered to be a secure investment for the future, or that was one of the lessons imposed by Adult Financial Literacy Advisory Group, an agency responsible to the Department of Education and Skills, essentially it was trying to turn passive recipients of welfare rights into asset managers. Attempting to pass this responsibly onto innocent bystanders was a mistake because everyone can’t be a successful asset manager or we wouldn't need banks or financial advisors.

Schiller, R (2000). The Irrational Exuberance. 4th ed. New Jersey: Economic Affairs. 59-69.falls

Schwartz, M & Seabrooke L. (2009). Boom and Crash: The Politics of Individual Subject Creation in the Most Recent British House Price Bubble. In: Shaw, T The Politics of Housing Booms and Busts. England: Palgrave Macmillan. 52-75.

Consumption & Housing Prices

McGreal, Brown & Adair (2010) state that "housing is a multi-dimensional commodity embracing both consumption and investment; hence, the price asked for a property (list price) or a price achieved (sale price) reflect not only the attributes of the property." They indicate the tension within the house market due to competing interests, which in-turn affects the prices. As an investment, housing markets are susceptible to cycle, featuring bubbles of booms and busts.

Source: ONS (2009) & Nationwide (2013)

The UK bubble began to form around 1998, but saw a slight decline between 1999-2000. Following this the boom really began, but growth rate began to slow down, which indicated a possible economic denial between 2003 & 2004, but 2006/2007, the bubble burst. A study produced in 2009 by 4 individuals, Razio P. Attanasio,W Laura Blow,Z Robert Hamilton and Andrew Leicester using housing price growth & consumption growth proposed 3 hypotheses; house price increases, increased household wealth & consumption; house price growth reduced constraints on debt due to increased collateral for homeowners and house prices and consumption are linked by common factors. This sounds very similar to the American bubble. You’d think they would have learnt from the British seeing as the UK bubble burst a few years before.

Source: ATTANASIO, ORAZIO P. et al. (2009)

Cambell and Cocco (2007) and Attanasio, et al. (2009) found in their findings that owner-occupiers who intend to remain in their accommodation for a prolonged time were hedged against price fluctuations because they weren't exposed to the buyers’ market. However, this meant that first time buyers couldn't afford housing which was the case during the bubble.

 

Notes:

1: GDHI (Gross Disposable Household Income)

References:

Attanasio, O.P., Blow, L., Hamilton, R. And Leicester, A., 2009. Booms and Busts: Consumption, House Prices and Expectations. Economics, 76(301), pp. 20-50.

McGreal, S., Brown, L., & Adair, A. (2010). List price and sale price variation across the housing market cycle. International Journal of Housing Markets and Analysis, 3(2), 89-99. doi: http://dx.doi.org/10.1108/17538271011049731

Nationwide, 2013. Housing Price Index (HPI). 1. England: Nationwide.

Office of National Statistics, 2011. Regional Gross Disposable Household Income (GDHI) 1995-2009. 3. England: Office of National Statistics.

Sinai, T. and Souleles, N. S. (2005). Owner-occupied housing as a hedge against rent risk. Quarterly Journal of Economics, 120, 763–89.

Tour De Economy

An excellent analogy I read in Kindleberger & Aliber’s (2003) book in describing a bubble read as follows “After several years of bubble-like behaviour [it] resembles that of a young person on a bicycle; the rider needs to maintain the forward momentum or the bike becomes unstable.” Fitting don’t you think?

Bubbles appear across the world, some more notable than others relating to commodities, currencies, property and shares have been prominent since the early 1970’s. With housing and property bubbles, property differing to housing because it includes commercial buildings, occurring in the 1980’s in Japan, Finland, Norway and Sweden, the 1990’s for Thailand, Malaysia, Indonesia and other neighbouring Asian counties, it’s not just the UK and America who have seen the boom and bust. Kindleberger & Aliber (2003) define a bubble as “a non-sustainable pattern of price changes or cash flows”.

History has taught us that the implosion of bubbles is quite often quickly followed by economic failure and the collapse of banks and other financial firms, followed by a sluggish economic growth in years to come. Wall Street Crash (1929) & the sub-prime collapse of America comes to mind. Global recession and depression. Some Journalists compared the collapse of the American property bubble to the Wall Street Crash and rightly so.

Revisiting the History

I've attached an extract from Kindleberger & Aiber (2003) who in their book, Manias, Panics and Crashes: A history of Financial Crises, provided an appendix at the back of their book presenting chronological order of previous financial crises.

Kindleberger, C & Aliber, R (2003). Manias, Panics, and Crashes: A history of Financial Crises. 5th ed. New Jersey: Wiley Investment Classics. 256-265.

Chapter 15.....

While looking into research for this blog, I came across a website established by Chris Martenson. He provides a crash course in finance, banking, and science.

His 15 minutes video on “bubbles” I found to be very interesting. With some research I found he has a PHD in neurotoxicology, and an MBA in Finance with 10 years’ experience in corporate finance and strategic consulting. Here is the link to his video explanation of bubbles.

I suggest this to anyone who doesn't understand bubbles or how they occur. It does look primarily at the American housing bubble but it’s all relevant. 

History at a glance – “This time, it’s different”

They've shaped and crippled economies, they've had an effect on each and every one of us but how do we know when a bubble exists? Well I’ll tell you, a bubble exists when asset price inflation rises beyond what incomes can sustain. Economic bubbles have been around for generations with the first recorded bubble, Tulip mania, dating back to the 17th century. Although there has only been 6 significant cases pre twentieth century, over the past 100 years, bubbles have arguably become more destructive to the economy. I know you probably don’t remember the Wall Street Crash (1929), but fundamentally, that was the boom and bust of an economic bubble which plunged the world into depression. Now at this point I have to restrain myself from going off in a tangent about the Wall Street Crash being a catalyst for the rise of the Nazi’s, this is neither the time nor the place.

Personal interests aside lets fast forward 71 years to 21st century, home of the real estate bubbles. Now the UK housing bubble burst around 2006/2007, but still today it is a hot topic amongst journalists, academics and the government, and will continue to be until regulations tighten and effective preventative measures are developed and tested.