Business Economics Essay Example | Topics and Well Written Essays - 3000 words

Business Economics - Essay Example (Hay, 2009, p. 461) The bubble formed by the housing price was the initiator of the general global economic crisis brought over to the whole world. What initiated the crisis was the bursting of the house price bubble in the United States and the problem was magnified by the aggressive mortgage lending prices. The housing market or the real estate market comprises of several differentiated markets as the owner occupied market, rental housing market, urban business properties market that is the factories, shops and the offices, the agricultural land markets and the recreational properties. There are five main reasons that are held responsible for the house price bubbles; they are low interest rates, development of new and innovative financial products which facilitated the availability of the credit, the tax treatment was also in favor of the debt-financed and owner-occupied housing; shortage in the supply of land in the attractive urban areas, increase in the purchase of houses as a r ental property or for speculative purposes. (Muller, Almy, Engelschalk, 2009, pp. 17-20; UK Economy in ‘Worst Crisis’ in 60 years, 2008) The Housing market Crash The UK housing market The real house prices have grown stronger over the past years, which have been volatile accompanied by macroeconomic fluctuations. The UK Housing market has gone through significant turbulence since the early 1980. In the period between 1982-1989, the market experienced a rapid rise in the housing prices, but meanwhile the housing prices showed a downward trend during the period 1990-1992 resulting in house price inflation. Accruing to the high economic growth in the years 1992 and 1993, the housing market in UK witnessed an increase in the average house price inflation, which originated in London and the South East region, which had a rippling down effect towards the north. The UK housing markets are the result of the personal sector wealth proportion, which was invested in the owner occu pied dwellings. The UK owner occupied dwellings accounted for 20 percent in 1960, which increased to 40 percent in 1990s. Highest owner- occupation rates and the lowest private renting characterize UK. The main reason which drove the financial turbulence in the housing market in 1980s are the liberalization of the financial markets and the policy of ‘Right to Buy’ which ensured the transformation of the population from the rented house to the private own occupied house. The increase in the competition among the lenders resulted in the fact that the borrowers get loans. This resulted in an increase in the household sector mortgage indebtedness from 25 percent in 1980 to 75 percent in 1992. The average mortgage advance reached its highest 60.1 percent in the year 1986, and thereby remained at a steady 58 percent for the rest of the 1980s. The house price inflation was fueled by the amalgamation of factors like increased in demand for housing, rising incomes, and an increa ses in the competition to supply mortgage lending. (Figueira, Glen, Nellis, 2005, p. 1756; UK house prices drop like a rock, 2008) The reason behind the crash The main reason behind the UK housing crash was it’s serendipitously stumbling upon the economic growth trajectories, which were mainly consumer-led and private debt financed in the early 1990s. Both