Where are we now?

The UK has seen varied levels of intensity from the effect of the housing bubble burst and the global recession. Although it may be hard to determine how sever the effect has been for sub-regions in regards to housing prices due to the lack of nationally recorded evidence, there is a visible difference. With stronger mini-economies like Aberdeen and London due to their exposure to specific markets, they have recovered very quickly after the bust, other regions like Northern Ireland and Wales felt the full force and the prolonged depression due to their lack of economic stimulate.

Over recent years, sub-regions in Scotland, there has been an increase in information being recorded and presented for analysis. Accompanying this, it hasn’t been all bad, with a redistribution of wealth and the decline of markets, some groups with the economy have benefited such as the first time buyer. Many first time buyers were pushed out of the market due to the excessive growth rates that housing price experienced but upon the collapse this changed everything giving them the leverage to bargain and acquire what is normally the most valued asset in many individuals asset portfolios.

Unfortunately though, history seems to always repeat itself. With property booms across the globe and clear indication of their presence, Governments are faced with the dilemma to either prick the bubbles or ride them out, with most riding them out. Historical events like the Great Depression which was a pricked bubble, caused one of the worst financial and economic contractions ever recorded and this has installed a wary defence mechanism in Government to avoid pricking asset bubbles.

5 years after the event, where are we now?

According to reports and predictions, the UK isn’t out of the water yet. With overall all GDP down 0.3% in Q4 2012 (Webb, 2013), there is optimism among some economists, for instance PwC’s John Hawksworth, chief UK Economist, who predicts a 2% growth in the economy (PWC, 2012). Although the Bank of England has been discussing more drastic approaches to boost the economy such as negative interest rates and long-term commitment to bond buying according to Reuters (2013). In the end only time will tell and it depends on the Government to stimulate the economy and lift us out of this slump, housing has greatly improved but the economic situation has far to go.

References:

Pricewaterhouse Coopers (November 2012) UK Economic Outlook: Summary report - November 2012, Available at: http://www.pwc.co.uk/the-economy/publications/uk-economic-outlook/ukeo-november-2012-summary.jhtml (Accessed: 28 February 2013).

Dominic Webb (2013) Components of GDP: Economic Indicators page - Commons Library Standard Note, London: Parliament.

Reuters (February 2013) Britain's Old Lady shows appetite for new thinking, Available at: http://uk.reuters.com/article/2013/02/28/uk-boe-focus-idUKLNE91R01Q20130228(Accessed: 28 February 2013).

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

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.

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.

An Introduction of sorts

I'd like to welcome you to my blog and will begin by explaining why I'm here and what I'm doing. As a student at Queen’s University I have been asked to create a blog. Now as an average or at least what I consider average, university student from Northern Ireland blogging has never been something I considered a hobby but as part of my Money and Banking module for my Masters in Accounting and Finance I have been asked to do so. 

With the various and open ended topics given I have chosen to take a look at the UK housing bubble for a number of reason. Firstly I believe housing can be a real money maker and a sound investment if you do your research and it is most certainly something I would like to be involved in when I have the capital to do so, and after all who doesn't want to make more money? Secondly I have many questions I want to ask, and I will hopefully find my answers out there, whether it be through the Internet, academic journals, textbooks, the newspaper or the news. Finally I want to compare how the UK housing market and the housing markets across Europe and the rest of the world are matching up in comparison.

What does this blog set out to do? I will briefly look at the history of bubbles, specifically housing bubbles, and I will be focusing primarily on the UK housing bubble and where we are today. I will glace at how the American housing bubble and global recession has affected the performance and recovery of housing in the UK. Key areas I aim to address are the "mini-economies" across Britain, the likes of Aberdeen and London where the recession was hardly felt and how housing was affected there. I will finalise by drawing back a comparative analysis to Northern Ireland and present my conclusions.

Now at this point I’m not sure if my peers are interested or motivated by the concept of writing a blog but I feel this could be an interesting journey to keep myself motivated and up to date in parts of the economy that interests me and this could well develop into something more than coursework but a hobby instead. Let’s see how this turns out I suppose…..