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

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.

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…..