Impact of Debt on the Housing Market in the United Kingdom - Essay Example

Impact of debt on the housing market in the UK Introduction Debt is an amount owed to a person or organization for funds borrowed. It can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements (Debt, n. d.) Whenever a person or organization lends money, he or the organization will set forth certain rules in the repayment terms. These repayment terms will always be beneficial to the lender. For example, in most of the cases the loan seeker forced to repay more money than he actually borrowed in the form of interests. The lender always lends the money on a business perspective and hence he will enforce tight rules and regulations upon the lean seeker. The loan seeker might be badly in need of the money and will accept all the conditions of the lender. Western people generally and the UK people in particular have a have a habit of spending all the money they earned and they don’t bother much about the need of saving for the future. Whenever they are in need of a bulk amount for purchasing a home or car they will approach the banks or other financial institutions for loan. These financial institutions are ready to help everybody irrespective of their financial capabilities before the current global economic problems started. But at present most of the financial institutions have tightened the screws by enforcing strict rules and regulations for granting loans for individuals. Housing market is one of the most important sectors as far as the loan exercise is concerned. Some of the statistics available for the UK housing market in 2009 is given below. There were 6,200 first-time buyer loans for properties between the old threshold of £125,000 and the temporary threshold of £175,000, representing 32% of the 19,700 loans to first-time buyers in September. In addition, 7,800 first-time buyers (40%) bought properties valued below the £125,000 original threshold. There were 7,300 home mover loans for properties between £125,000 and £175,000 which was 24% of the 31,000 loans to home movers in September (One third of first-time buyers make lucky stamp duty escape, 2009) This paper briefly explains the impact of debt on the UK housing market by analysing the levels of personal debt, rent arrears, housing association etc. Housing market in the UK The table given below shows the loans for house purchase and remortgage statistic in UK, in 2008 - 09.   Number of house purchase loans Value of house purchase loans £m  Number of remortgage loans  Value of remortgage loans, £m   September 2009  50,600 7,000   33,000  4,100  Change from August 2009  +2%  +1%  +10%  +11%  Change from September 2008  +43%  +37  -48%  -52% (One third of first-time buyers make lucky stamp duty escape, 2009) It is evident from the table that the borrowing habits in the housing market go on increasing. Because of the current recession, the criteria for lending have been tightened by many financial institutions and even then the borrowing habits were not affected. House prices are skyrocketing year after year and the earnings of the ordinary people are not enough to meet even for their daily expenses. The current global financial crisis has come at an unexpected time and nobody was prepared for it. Even the economic Gurus failed to predict it. UK was worst affected by the recession and many people have already lost their jobs and man y people suffered salary cutting or reduction. Moreover, financial institutions have already strengthened the rules for granting housing loans and ordinary people at present are struggling to get loan assistance from the banks. Real estate sector was one of the adversely affected sectors because of the current financial crisis. Construction works were reduced considerably and real estate companies are struggling for their existence. Even though, the activities in real estate sector are less due to less demands, the prices of the houses has not come down at all. Many people thought that the real estate companies may reduce the prices of the buildings and apartments. In fact, even amidst the reduced activities in the construction sector the prices are still showing the upward trend. The chart given below clearly indicates the upward trends in house prices in UK form 1983 to 2007. Form the chart it is clear that the housing prices recorded an all time high in 2007. From 1995 onwards the housing prices began to rise and it is still going in that manner only even amidst less demands. Real estate companies are waiting for the market to stabilize in order to sell out their apartments and buildings. They are not ready to reduce the price below certain levels because of the high expenditure they made on building these apartments, flats and houses. (Walayat, 2007) The last three months of 2009 has shown significant changes in the asking prices of the houses. The real estate companies were forced to reduce the asking price during this period. In spite of the lowest average stock for sale for 21 months, new sellers have dropped their asking prices by 2.2% this month (-£4,977). This follows November’s fall of 1.6%. Many people expect a further drop next month, meaning the final quarter of 2009 will see 3 consecutive monthly price falls as the motivation of winter sellers outweighs the growing lack of choice for potential buyers (The rightmove house price index, 2009) In short, the recession hit areas may continue to witness a price reduction in 2010 whereas other areas may continue the upward trend in house prices. In any case, the housing market has undergone many structural and functional changes because of the current recession and in all probabilities these changes will long last in the housing market segment. The impact of debt on the housing market in the UK It is a fact that increased debt always retards people from spending more. As mentioned earlier, the current recession resulted in many people losing their jobs and many have their salaries cut down. In other words, the financial capabilities of the public have been severely affected. In other words, the debts of the ordinary public has increased a lot and they are not in a position to think in terms of taking further loans for their house purchasing needs. The impact of debt on housing market can be better analysed by the evaluation of level of personal debt, rent arrears and the performance of housing associations. Levels of personal debt Britons have racked up so much debt on loans and credit cards that the total borrowed now exceeds the entire value of the economy, new research shows today. The financial consultant Grant Thornton is forecasting that gross domestic product (GDP) will hit £1.33 trillion this year, less than the £1.35trn which was outstanding on mortgages, credit cards and personal loans in June. The runaway housing market is the biggest reason why consumer debt has spiralled, totalling £1.131trn. Debt on personal loans and credit cards totals £214bn. Overall, individuals owe the staggering sum of £1,344,721,000,000 (Hickman, 2007). In other words, first time in the recent history of Britain, the British public owe more to the financial institutions than the value of everything produced by them. Such a scenario is not good for any country. The personal debt of the public should be less than what they are capable of producing. They buy now; pay later attitude of the British public has contributed for this crisis. The westerners in general and the British public in particular do not have the saving mentality. They always spend more than what they earn by taking loans from the banks. On the other hand, people like the Indians or the Japanese save the excess money for their future needs. It is because if this habit, the current crisis has not impacted them much. The accountants Grant Thornton reported that the total amount of outstanding debt amassed through mortgages, loans and credit cards rose by 7.3 per cent to £1.44 trillion over the year to June 2008, up from £1.35 trillion the previous year (Daley, 2008). The debts of the British public continued to be in excess compared to the Gross domestic Product (GDP) for the second consecutive year in 2008 and 2009 also not an exception. The borrowing has increased a lot in the recent past because of the low interest rates. People neither anticipated anything like the current financial crisis nor were they warned by the financial pundits. They miscalculated that the British economy was stable enough to overcome any crisis situations and they decided that the loans available for low interest rates should be utilized. The sudden and unexpected failure of the poor to repay home loans in recent months has created a "sub-prime" crisis that has spooked the financial markets and wiped billions of pounds off share prices (Hickman, 2007). The sudden fall of share prices caused heavy losses of money for many people. As mentioned earlier, British people save little for the future and that also mostly in the form of investments in stock market. The stock market failure or destruction was thus a serious problem for the British public. They lost most of their money invested in the share market and their financial abilities were considerably reduced. In a Survey conducted by Moneyexpert.com, found that 7 per cent of adults were "very concerned" about their ability to keep on top of their debts, which would amount to 2.5 million adults (Hickman, 2007). Rent Arrears ‘Arrears’ is a term stand for payments made after the service has been provided. Usually tenants have two options for paying the rents. Some of them pay the rents well in advance whereas some others pay the rent after certain period of stay. Rent paid after certain period of stay can be referred as the rent arrears. ‘Rent arrears’ is a form of debt which the tenant owed to the landlord. Normally, for low income people, the UK government is giving Housing Benefit, Council Tax Benefit or tax credits. Even the Housing Benefit receivers may get some extra money - called discretionary housing payment if the housing benefit received is less than the actual rent (Rent arrears, n. d.) The delay is processing of such governmental grants for the housing rent often results in rent arrears. Rent arrears are serious as the consequence may even result in eviction. No landlords want to accumulate the rent arrears beyond certain limits. If the tenants cross such limits set by the landlords, the cases will be often referred to the court proceedings. Tenancy contract is an important agreement in such cases of dispute; the court might be interested in. Debt related to the housing should be given preference as shelter is one of the basic necessities of every person just like food. But in UK, people are always not keen in giving much importance to the rent arrears. They are of the view that it is the government’s duty to give proper shelter to all its citizens and they have nothing to do with such things. In a democratic set up like in Britain, public depend the government for everything. On the other hand, the government is struggling to find enough money for giving such housing benefits to the public. So they will ensure that the housing benefits given are reaching the pockets of the right and deserving people alone. For this they need to undertake the proper investigation which may delay the allotment of housing benefits even to the deserving people. The delay is allotment of housing benefits result in rent arrears and the landlords may not hear the excuses from the tenants in such cases. Thus ‘rent arrears’ is one of the biggest problems in the UK housing sector. Housing Associations Housing associations in UK are not-for-profit bodies functioning independently for providing low cost housing for the people in need. Such housing organizations normally provide homes for rent when they have surplus. No real estate company wants to keep their constructed building for longer periods if the demand for purchase is less. In such cases, the construction companies will depend the housing organizations for finding the people who are in need of shelter on rental basis. Housing organizations originally appeared in the post-Industrial revolution years of the 19th century. They grew in importance in the 1960s and 70s with the increase in emphasis on social inclusion, and grew in the 1980s, when limitations imposed on council housing by the Thatcher government enabled them to take over a much bigger share of the social housing market, increasing in size and importance (Shanks, n. d). Housing associations may have different types of buildings suitable for the needs of all kinds of people based on their budget. Apart from providing houses for normal people, these housing associations have special projects or rehabilitation centres for people with mental or learning disabilities, drug or alcohol addicted people, homeless people, older people etc. Even though housing associations undertake lot of social activities, all of them run as commercial organizations. The revenue obtained through different activities will be utilized for the acquisition and maintenance of the property by the housing associations. Even though, these housing organizations are generally considered as private bodies, it is controlled by the housing corporation in England, a governmental body. The housing associations in UK have not a well defined strategy either in their objective or functioning. Some of them are registered charities while others not. Some of them may help the poor and the needy people while others function purely based on the business mind. Some housing organizations may offer some subsidies to some particular segment of people in the society whereas others may not give such concessions at all. Housing organizations are getting lot of assistance from the government, but most of them working for making profits rather than servicing the public and the public demand for the better control over these housing associations is increasing at present (Shanks, n. d). Conclusions UK housing sector is undergoing a stiff and challenging period at present. Global financial crisis has affected the housing sector a lot and many construction companies are on the verge of closing down their operations because of less demand for their developed properties. The ordinary people are not getting the necessary support from the financial institutions at present as they have tightened the rules for providing housing loans for the public. The GDP growth is less and for the first time in the recent history the British public owes more and produces less. Personal debt, rent arrears, and housing organizations the three major entities which affect the housing market in UK. Even though the financial crisis has resulted in less demand for the housing projects, the prices of houses has not come down accordingly. Even though the housing prices shows slight decline at the financially affected areas, in other locations, the prices are still going up. The upward trend of housing prices may likely to continue in 2010 also. The combined effect of the financial crisis, loss of employment and the increasing prices for the essential commodities may increase the debt of ordinary people beyond the limit. Debt is a bad thing which can affect all the domains of human life and housing sector is also not an exception. At the same time, it is difficult for people to stay away from borrowing in the current world because of the increasing living standards and expenses. The earnings and the expenses are not compatible always and people were forced to rely on financial institutions for fulfilling their dreams. If the person, who borrows the money, has enough financial capabilities, debt may not create much problem to him. On the other hand, the habit of borrowing without considering the financial capabilities to repay it always creates problems in future, both for the borrower and the lender. References 1. Daley James, (2008), Personal debt in UK exceeds GDP for second year, Retrieved on 28 December 2009 from http://www.independent.co.uk/news/business/news/personal-debt-in-uk-exceeds-gdp-for-second-year-905461.html 2. Debt (n. d.), Retrieved on 28 December 2009 from http://www.investorwords.com/1313/debt.html 3. Hickman Martin, (2007) For the first time, Britons personal debt exceeds Britains GDP Retrieved on 28 December 2009 from http://www.independent.co.uk/money/loans-credit/for-the-first-time-britons-personal-debt-exceeds-britains-gdp-462825.html 4. One third of first-time buyers make lucky stamp duty escape, (2009), Retrieved on 28 December 2009 from http://www.cml.org.uk/cml/media/press/2455 5. Rent arrears, (n. d), Retrieved on 28 December 2009 from http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/DebtsAndArrears/DG_10019426 6. Shanks Hannah (n.d), What is a housing association and what services do they offer?, Retrieved on 28 December 2009 from http://www.ourproperty.co.uk/guides/housing_association.html 7. The rightmove house price index, (2009), Retrieved on 28 December 2009 from http://www.rightmove.co.uk/news/files/2009/12/december-2009.pdf 8. Walayat Nadeem, (2007), Retrieved on 28 December 2009 from http://www.marketoracle.co.uk/Article1893.html Read More