Lehman Brothers

EXECUTIVE SUMMARY

Since the human race decided to create an organizational method of living, the house and property became the most valuable thing we have and also can add status to someone in terms of size, type and quantities of property a person can have.

The oldest house is dated from 10.000BC and made from mammoth bones found near Kiev, Ukraine and since then has been made from different types of materials, size and also for distinctive purposes. In mega cities as New York, Tokyo, Sao Paulo and Chicago is very common to see people living in high rise buildings as those metropolis are becoming more and more compacts for lack of space and price of land.

INTRODUCTION

For the past few years before the collapse of Lehman Brothers, the UK housing market has boomed with prices rising much faster than household incomes. After its drastic crash in the early 90's, the housing market in this country had a huge recovery. According to HBOS index the average house stands at around £163,000, nearly double of the asking price of £82,000 on the late 90's.

Many factors created the reason of such increase in the prices and we will discuss point and analyze the market and the facilities of getting mortgage before, during and after the worst recession since the Second World War.

This assignment will illustrate the variations in price in the past 3 years, the analysis in the housing market and the reasons of the high demand that affect the price until the fall of financial market that nearly collapse the entire economy.

HOUSE MARKETING ANALYSIS IN THE UK FOR THE PAST 3 YEARS

In 2008, many easy credit mortgage deals have been removed from the market. Despite the actions taken from the Bank of England to reduce the rate interests and easy the financing terms and increase liquidity, will not address the real issue about the mortgage liquidity and will not make the UK housing market back at the same levels as the pre-crunch.

According to Halifax the UK house prices have declined by more than 20% since the peak of 2007 from the UK national in 15% and around 25% inner London despites even the Olympics in 2012.

(www.marketoracle.co.uk)

Analyzing the graphics above we be able to visualize the pick in February 2007 and failed to show the evidence of the Credit Crunch. The reasons of the trigger of the Credit Crunch started the default of the subprime mortgage in USA and also despite of the rising interest rates that been forecast at the end of 2006. The institutions created numerous reasons for the rising of the housing market especially in London (i.e. immigration, lack of home building and the strong UK Economy).

With the expansion of the European Union, many countries in 2004 like Poland helped to increase the number of immigrants up to 800.000 and the easy access of the Work Permit for many areas in the economy also add pressure in demand for properties. Other factor that put UK in the centre of the bubble house market was the fact the UK economy outperformance was higher than other European countries. According to UK housing market, after the peak of the house prices and the bust of the Northern Rock, the credit market started to deteriorate as the capital gain tax changes implying in the housing market crash in 2008.

Before discuss this changes for the last 3 years, we need to bring up the real causes of the crash of the credit in the UK house markets. This word called subprime wasn't much heard before the recession and we need to understand the real meaning and the reasons why banks created such policies to offer this type of credit.

Subprime was created to offer people with poor credit ratings or limited credit histories. A simple example is they would lend money to consumers that have bad credit. The score indicates to the lender the rate of default. Those with credit scores below 620 have much higher default rate than people with score above 720.

However, if a borrower has income sufficient than he or she may qualify for a subprime mortgage product. This type of product normally carries a higher risk for the lender due to the credit risk characteristics of the typical subprime borrower. In many cases, the lender tries to offset the risk with higher interest rate. These higher fees compensate the lender for the increase of costs in case of default from consumers.

According to the US Department of Treasury (where everything started followed by the UK), “The subprime mortgages borrowers typically have weakened credit histories that include payment delinquencies, and possibility more severe problems such charge-offs, judgments and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that many encompass borrowers with incomplete credit histories.” (Bloomberg.com, 2007)

In September 2008 house prices continued to fall as increasingly bankruptcy of the banks and the government started to panic judging the global financial market could collapse creating the biggest depression ever imagined in history. Many of the big banks in UK had to be rescued in special the HBOS, leader and biggest mortgage bank in this country.

(www.marketoracle.co.uk)

After the rescue and the nearly collapse of the HBOS, Lloyds TSB and the Royal Bank of Scotland, the credit the money completely vanished from the financial market in UK with lenders and the government in the dark about what was going to happen in the next few weeks. Nobody have a clue about which direction to take and the credit completely dried off.

As consequence, the banks stopped conceding credit or created difficulties for consumers to access the mortgage products raising the initial deposit to minimum of 40% percent of the value of the property. The most hit of them were the first time buyers as they struggle to attend those conditions and the lack of requisites sent them back to renting market until better opportunities or creation of new mortgage products allowed them to re-entry again into the housing market.

THE FACT THAT AFFECT PRICES OF HOUSES IN UK

According to the property research group Hometrack's latest housing market outlook the fragile economy are likely to push house prices lower with the rising of unemployment and strained household incomes. Following the no growth in prices in 2009, the house market in UK is likely to fall around 1% in 2010 dragging on slow demand.

“Over the last year, estate agents across the country registered 41% increase in demand, while London reached 70%. Those regions with the greatest increase in demand also registered the strongest growth in pricing, namely London, the south-east and south-west. These regions also saw the greatest supply shortages” Hometrack said. (The Guardian, December 2009)

The house prices have been affected by a combination of demand and supply factors. When the demand is high the prices goes up and the conditions are less positive for the consumer as if he or she doesn't take a fast approach or decision and pay the asking price they are likely to lose the chance to close the deal as other candidates will take the opportunity to close the deal. In case the opposite, and the supply factor is higher than the candidate will have more choices to choose from, also can negotiate discounts or pay less than the asking price as there will be more properties than candidates.

house-price

(www.economicshelp.org/nationwide)

If the economy goes into recession and unemployment rises, the demand for houses fall significantly.

The demand side factors are like to be:

- Economy growth/ Real Income:

The rising income enables people to spend more on buying a house. Normally the candidate can get three times the value of their salaries (i.e. a person earn £30.000 the building society would lead £90.000). So the rising of the income would enable house prices to rise.

- Interest rates.

This affects directly the cost of paying a mortgage. Repayments are usually the biggest part of the homeowner monthly spending. The majority of the homeowners in UK have a variable mortgage with means an increase in rates will raise the cost, making hard people to buy. Fixed rates mortgage has been insulated from fluctuating rates for 2 to 10 years. Also is important to consider real interest rates (interest rates-inflation) and normally when the Bank of England cut interests, the commercial banks will not pass straight away or not in full onto consumers.

- Consumer Confidence

When the pick of the housing market was on, the consumer confidence to buy a house also was high and they were willing to take more risks and also accept mortgages with a high debt to income ratio.

- Availability of Mortgage Finance

After the deregulation of the banking sector increased competition, the banks created a different number of mortgage products such as interest only, self certification and mortgages up to 6 times income. Those products enable people to get more mortgages increasing the demand for housing. During the Credit Crunch in 2008, those products fell drastically due to a shortage of money in the financial market.

- Demographic factors

If there is more single people living alone the number of households can rise faster than an average family size. Also there are factors that can help such as increase in divorce rates, immigration from Eastern Europe, life expectation and children leaving home early.

- Speculation

An increase number of property investors buying houses for capital gain and renting can affect the price of property. This make house more volatile because of the speculators will buy in a boom and sell in a bust.

EXPECTATIONS FOR THE UK HOUSING MARKET FOR THE NEAR FUTURE

“The next generation of first-time buyers will face house prices equivalent to ten times their average incomes, putting home ownership out o reach for the majority of young people, a new government agency says today”(Times Online, 2007). This was published when the bubble was about to bust and the global economy was just looking forward and the biggest issue was oil and food shortage as the world population was going to demand a huge quantity of commodities.

Looking now at the present reality, the scenario is completely different. The country just came out of the worst recession since last world war and the market is far optimist as 3 years ago. Some experts says that will take years and some a decade for the market reach the peak of pre-crunch.

According to the Building Societies Association, “around 49 per cent of people think property values will increase in the coming 12 months, while 12 per cent think they will stay the same” (The Telegraph, June 2009). The numbers show confidence from the consumers for the near future while everyone still believing that anything can happen. Although bank institutions and the government are aware and will not allow subprime mortgages to be back into the market for creation of a new bubble.

The rise in confidence follow a run positive data in the housing market, with both Nationwide and Halifax reporting prices rises for the near future. Also estate agents have reported continued peak as potential buyers are tempted back into the market by recent house price falls and record low interest rates.

The figures show also the risen of the house prices for the seventh consecutive month according to Halifax, rising by 0.6% in January. However, they predict that prices will stay flat overall in 2010. Owned now by the Lloyds Banking Group, Halifax said the average price of houses in UK is now 9.9% above April 2009.

The calculation of the annual rise is based in the last three months with same previous trimester.

UK annual house prices graph

(www.halifax.co.uk)

Centre for Economics and Business Research states that house prices could soar 20% in the next three years and will go up more than 6% this year. Regarding of the improvement of loan approvals and mortgage availabilities helped to revise its forecasts up against the previous one when experts were expecting flat house prices this year.

The CEBR believe in the rising of prices from £167.000 to £178.000 by the end of 2010 which correspond in an increase of 6.5% and the prices could return to the peak of 2007 sometime in 2012. The reason behind this optimism is the shortage of new properties and the pick of the mortgage market. Another reason is the Bank of England will keep the record low rate of 0.5% per annum until at least middle of the next year.

Mortgage has been predicted to achieve 72.000 approve by the end of the year comparing with 60.000 now and rising up to 90.000 a month by 2013. The true is still bellowing the pre-credit crunch levels, but also enough to sustain a price growth in the housing market. The situation in London still different as for the first time buyers needs to cash out an average of £57,213 in deposit on the average flat price of £228.628, according to Hometrack. But is believed that will be better deals in mortgage offers for those types of future homeowners.

CONCLUSION

In conclusion, my findings above show that the UK housing market has been severe affected by the recession as it was on the big factors that trigger the credit crunch. The market and investors lost enormous amount of money predicting a high demand before the bust of the bubble. In result of the contraction of the mortgage and the global financial market the sale of properties has fallen in numbers never predicted. Also, the possibility of getting credit and a new mortgage especially for the first-time buyers became very hard with the increase of the deposit, that banks required financial institutions for them to ingress into the ladder market.

For those who have conditions to buy a property, now is the best time as the prices has fallen considerably , the Sterling is very low comparing with other currencies in special Euro and from Emerging countries. Other bigger factor is the interest rate is very attractive at 0.5% a year creating factors for new buyers helping rising the UK housing market sales and reducing the rate of those who are searching for a new contract with the current mortgage deals.

Finally, the UK housing market for the next three years according to official records and statements shows a positive growth and rise in prices in the near future. What everyone needs to understand and learn from the past, is the fact, the market is still volatile and nobody has the right answer. Everyone hopes the global recession will be part of the past but also every institution in special bank societies and the government have to be more aware of the risks as the history can show all of us the always will be a new bubble in the financial markets.

REFERENCES

http://www.telegraph.co.uk/property/propertynews/5558886/Consumer-confidence-grows-in-housing-market.html

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article1896229.ece

http://www.walletpop.co.uk/2010/02/01/house-prices-to-soar-20-in-next-three-years/

(www.marketoracle.co.uk)

www.hallifax.co.uk

www.bankofengland.co.uk

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