Subsequent to the crumple of the subprime mortgage markets that characterized the United States’ financial markets, global fiscal systems have had to endure a persistent period of unparalleled turmoil. The implications accorded to this crisis have continually eroded the confidence amid the financial lenders as they became more apparent, the financial markets have turned to be more fragile. The participation of the financial institutions along with the governmental intervention especially in the banking sector has endeavored to utterly transform the global finance backdrop. The incumbent vagueness in the pecuniary markets has perpetually fuelled tumult towards the investment markets. Arguably, close to seven trillion dollars has been wiped out due to the crisis. The slump affecting both the commercial along with the residential markets due to diminutive credit availability in addition to a tautened lending criterion have led to a theatrical tumble in both the development and transaction activities. The United Kingdom (UK) banking institutions alongside their Swedish counterparts have been characterized with an elevated weighting on property pricing and exposure especially on their loan books. This way, they have attempted to contain as well as manage the lending capability in order to improve their liquidity position. This has expansively rendered them as being out of the market for novel businesses. The market sentiment has for long remained muted amid the mainstream of prime banks with positive anticipation that property pricing may fall. Such a perception is not a mere consensus but has forces pinned to the financial crisis the hit the globe not excluding the aforementioned countries.
The real estate markets in Sweden have embarked on combating the grand crisis that brought about marked plummeting prices as well as the production costs. High vacancy rates in addition to relentless escalating rates of loan defaulters along with the financial distress among the major lending institutions were attributed to the crisis. Nothing in the construction sector was spared with nearly all forms of commercial as well as residential constructions suffering due to the meltdown. Arguably, the office building in assorted urban centers was confronted with unprecedented declines in their pricing. The real estate upheaval presented massive impacts as far as the Swedish economy could be analyzed. For instance, homeowners as well as the local housing authorities alongside the investors in the real estate had to swallow the expansive losses that the crisis brought with it. Asset pricing plummeted and at the same time house rent went up frenziedly. The lending institutions as well as banking sector demanded for government guarantees with sporadic cases of financial support demands as lone avenues to offset the outstanding loan losses. These losses gradually spilled over to the macro-economies via tumbling the aggregate demand. This way, the strapping recessionary forces already in existence are reinforced in regard to the Swedish economy.
According to the LO economists´ group (2010), by the wake of 2009, a 5% of the downturn was reported with anticipations that the GDP will rise the subsequent year. However, the incumbent situation is intricate to interpret due to assorted factors. The dichotomy in the economic situation is identifiable as the prime intricate factor. Arguably, the industrial production has collapsed with diminutive signs of recovery as from 2009. Contrary, the performance in the service sector has relentlessly fuelled by an extroverted economic policy being described as markedly healthier. Another intricate factor that renders this prediction vague is the stark contrast in the statistics published compared to the optimism (pinned on the business barometer as an indicator) among the various Swedish companies.
Undoubtedly, the house pricing has a bearing on the bank lending. Similarly, bank lending status influences house prices. For instance, the economic meltdown that hit both the residential markets as well as commercial in the UK and Sweden attributed to narrow credit availability impacted on the lending procedures. In essence, the lending criteria had to be tightened leading to a dramatic tumble in the transaction as well as development activity in both countries. In this regards, the banking sector in both countries have had to elevate its weighting on property loans as an attempt to sustain their liquidity grip. As a result, majority of them have remained upbeat by the markets not engaging in other enterprises due to high property costs. Additionally, the market outlook has remained subdued among most banks. The anticipation and hope is that property prices fall as soon as possible.
1.2 Statement of the problem and Justification
The subprime mortgage predicament that developed in the course of 2007 and 2008 came with housing bubble burst. This was not contained in the United States but its impacts spread across to European real estate markets. Though the slump in Sweden dates back to the 1990s, this crisis further elevated the then incumbent situation. The real estate markets in Sweden have embarked on combating the grand crisis that brought about marked plummeting prices as well as the production costs. High vacancy rates in addition to relentless escalating rates of loan defaulters along with the financial misery among the major lending institutions were attributed to the crisis. The United Kingdom was not spared either. Arguably, the IPD total property return index of the United Kingdom was recorded at -24% as by the year 2008. In addition, wholesale funding in the mortgage industry turned out to be an imperative feature subsequent to the deregulation of the 1980s. This has been pointed out as an outcome of the crisis that encompassed the building industry prior to this period. This measure allowed most banks as well as specialists to tap the wholesale market (for lending purposes) as a funding source to overcome the then incumbent crisis. The introduction of the covered bonds fed substantial expansion in regard to the total public issuance by the year 2000. Arguably, the year 2006/2007 recorded the peak of the crisis attributed to the subprime crisis. Clients are having mortgages permitted but a small number of them are affecting the purchases rendering the lending institutions stagnant. Consequently, the fiscal support being paid out by the lenders has plummeted due to the financial crisis.
The impacts that the financial crisis has had on the lending institutions ought to be assessed. This way, counteractive strategies and policies can be put in place to curb them and so that future eventualities that could be associated with economic meltdown do not severely affect lending systems as it has been. This study sought to assess the impacts of the financial crisis on mortgage lending and residential property prices drawing evidence from UK and Sweden. This is invaluable to policy makers as well as the banking sector and other lending institutions to develop strategies of curbing losses attributed to the crisis. This is imperative since the impacts of the crisis are still persistent at present.
The section reviews relevant literature on the derivation of the financial crisis both in Sweden and the UK. In addition, an overview of the documented impacts of the crisis on property market pricing and lending is reviewed. The impacts the on the mortgage industry and lending capabilities are as well reviewed with prime aim of identifying novel tools to curb them.these are imperative to the study. An outlin e of related research and gaps that need to be filled in order to answer the questions of the effects of the crisis on mortgage lending and residential pricing for policy development and strategy planning are discussed.
2.2 The UK Financial Crisis and Mortgage Lending and Residential Property Pricing
2.2.1 The financial crisis in the UK
Wholesale funding in the mortgage industry turned out to be an imperative feature subsequent to the deregulation of the 1980s. This has been pointed out as an outcome of the crisis that encompassed the building industry prior to this period. This measure allowed most banks as well as specialists to tap the wholesale market (for lending purposes) as a funding source to overcome the then incumbent crisis. The introduction of the covered bonds fed substantial expansion in regard to the total public issuance by the year 2000. Arguably, the year 2006/2007 recorded the peak of the crisis attributed to the subprime crisis with clients are having mortgages permitted but a small number of them effecting the purchases. As a result, the fiscal support being paid out by the lenders has plummeted due to the financial crisis. Forecasts about the UK economic undertaking remained somewhat lacklustre. The fiscal activities had slowed brusquely by the first half of 2008. The second quarter is argued to have marked a standstill of any further economic activities. The weakening here was expansively driven by a tumble in both the residential as well as the business investment. Provisional stimuli from the government investments were injected. However, as the fallout attributed to the financial crisis gathered momentum, the otherwise strappy labour market was diluted dramatically leading to unprecedented unemployment cases. The International Monetary Fund (IMF) premised that Europe was the likely grand victim of the crisis underpinning that the euro zone had fallen into recession after the subprime. In this regard, the UK and Sweden were officially in recession subsequent to posting perpetuated quarters of negative growth during this period. Monetary systems are intrinsically pro-cyclical often characterized with rises in credit, asset prices along with leverage that reinforces the causal economic dynamics. In some cases, financial imbalances have been pointed out that are followed by jagged correction.
2.2.2 Mortgage Lending and Residential Property Pricing in the UK
Proceeding to the fiscal crisis, the UK had experienced housing booms. Close to a decade, there was unprecedented rise in the UK housing market that most economists and analysts had forecast pinning their fears on the rise of house prices. They simply found this to be unsustainable. For instance, amid December 1999 to December 2007, the prices were as high as £107,000 or £119,000 depending on the index that was adopted. Arguably, the house prices averaged an augmentation from £75,000 to over £182,000 by December 2007.
Over the same period, the Halifax index of pricing indicated a similar rate of growth with even steeper prices closing at 196000 pounds. However, these figures do not account for the regional variations in the house pricing; however, they were representative of the overall trends that were exhibited prior to the depression.
The extraordinary rises of these price levels has been attributed to assorted factors. For instance, low interests rates as well as a strappy employment base along with constraints in the housing supply have been the most conspicuous. However, the fundamental drive of the growth was underpinned by the credit availability in the wholesale. The unremitting demand from most of the lending institutions implies that the lending criteria were not that stringent as they ought to have been. These demands are aimed at enhancing the share of the residential mortgaging. During the house boom, the expansive range of mortgage products such as the self certificate mortgages as well as the goods with loans to value ratios of over 100% implied that homeownership had been set open to a wider percentage of individuals who endeavored in purchasing homes. In addition, loan to income ratios were as well expanded to cover an access to a larger volume that require mortgage financing. The credit availability that was experienced between 2005 and 2007 coincided with this period of expansion.
According to the statistics drawn from the NHBC figures, the sum number of applications that one had to endure in starting a new home was close to 50% more compared to the 2007. Decline in novel build applications was markedly in the private sector. Within three months, The NHCB received over 18687 applications aimed at starting new homes within the UK. Of these figures, the private sector accounted for 10718. The UK Gross Mortgage Lending is summarized in figure 4 hereunder.
UK Gross Mortgage Lending (200-2008)
Conclusively, the housing recovery process in the UK will be inaugurated in London. It is anticipated that London may outperform the rest of the cities in UK all through 2011 projected at a growth of 9%. In run to the 2012 Olympics, Jones Lang LaSalle, premise that a percentage growth of 10% is within reach. The UK housing sector has projections too. In this regard, 4%-6% has been the premise. The market is then expected to gather momentum along with swelling construction costs will upshot in growth of house price growth by 20%+ pa in the subsequent period of ten years. Such impacts are to be assessed and proven or discarded by this study.
2.3 Origin of the of the financial crisis in mortgage lending in Sweden
House pricing in Sweden has had unprecedented escalation amid 1990 and 2010. Arguably, a comparison pinned to the 1996 statistics indicates an increase of over 135 percent by the year 2010. In addition, metropolitan cities have had a much higher augmentation. This high pricing in housing has had expansive effects on the mortgaging industry which subsequently triggered financial crisis.
Mortgage interest charge is visibly an imperative amplification of house prices as well as bank lending. According to Mandelletal., , the t-bill was averaged at 6.5 percent with the standard deviation of approximately 3 percent. This implies that, the coefficient of variation was quite elevated that best to be utilized in explaining the relationship that exists amid mortgage lending as well as the house pricing. House outlays are depressingly related to construction. This implies that in case of a single construction of a house for a family, house pricing is expected to tumble. The unpredictability in housing construction has persistently remained very high. In addition,
A lone reason for the huge interest is that astounds on house prices as well as the credit and money capacity entail momentous ramifications on fiscal activity in addition to aggregating the price inflation. For example, real estate price moving backward and forward may develop a significant brunt on consumption as well as investment expenditures in view of the fact that real estate accounts for a supplementary 50 percent of wealth globally. In addition, houses are the most essential collateral for bank lending . Outsized dangles in real estate costing that result in upsetting hurtles have been witnessed by assorted countries in the precedent two decades. According to Glick and Lansing, countries that appeared to experience the most rigorous declines in expenditure on occasion that house prices had started to plummet as well were the countries that experienced the prevalent augment in household weight as well as the highest rise in domicile prices.