UK Economic History And Its Influence On Property Market

To understand the financial situation in our country today we must get familiar with our history. According to many statistics, in 2008 England experienced her eighth recession since the Second World War. The results of which are still very much noticeable.

But let's start from explaining the definition of recession to better understand the whole process of financial market. Recession is defined as being a big slowdown in economic activity over a period of time not shorter than for at least few months. During that period many macroeconomic facts are getting changed in a similar way and the most important ones are: Gross Domestic Product (GDP), employment, household income and inflation which tend to drop down sharply. Bankruptcies and number of unemployed people are consequently rising. To sum up, recession occurs when we face a huge drop in general spending and a huge rise of unemployment, both happening at the same time.

Many years back the economic statisticians were quarrel about the main indicators of recession, finally in 1975 Julius Shiskin suggested quite simple rule stating that "two down quarters of GDP" means we could potentially face recession. Since then we use that particular rule to measure the economic downs. The National Bureau of Economic Research also describes recession as: "a significant decline in the economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales."

The older recessions in UK were in the late 1950s and early 1960s but they were both short and quite superficial. The next one in mid - 1970s was called stagflation and was probably one of the worst in our history. But undoubtedly the first place on the list of worst recessions was the one from the 1980s which lasted for more than a year and brought us a result of 5% drop in economic output. Another recession hit UK in 1990 and was not as bad and dramatic as production was falling only for about a year.

2008 surprised everyone in UK with new recession. It began in December 2007 in United States of America, but because these two economies are generally correlated, it hit UK soon after. In the USA mortgage crisis and fall in private consumption contributed to a recession which was the worst for Americans for almost 20 years - in September 2008 only156,000 people lost their jobs followed by approximately 553,000 job losses in November 2008, estimated results of which were terrifying with 2.6mln people losing their jobs throughout the entire 2008.

Each recession had a hugely noticeable impact on real-estate market, and the most recent we have experienced in 2008 was not exclusion. We can even say it was a pure example of how clearly can downturn affect the property market. Declines may last much longer than recession itself and I believe we can all still notice how property market has been changing since 2008. The UK house prices between 1998 and 2007 rose unbelievably and it made houses unaffordable for many people. All European countries experienced a rise house prices but in UK it became a sustained, regional trend and only between 2002 and 2008 house prices went up by 90%. For example, the average house price at the beginning of 1998 was £81,772 but at the end of 2007, just before the Great Recession started, same property costed £219,256. In 2008 house prices started to fall, and as we know they still tend to fall despite of the latest fact that recession was announced to have ended in 2009, and some analysts expect prices to contract by 50%. Some experts even think and believe that it will definitely take few years or maybe even a decade for house prices to get back to the peak level again.

As another reason for recent recession we can undeniably mention mortgage lending issue. From 2001 to 2007 mortgage lenders were offering loans to people who had poor credit rating just for increasing their own income. As a result the mortgages which didn't require a deposit became a major part of mortgages taken out on the market. As a result more people were entering property market, whether to buy a property to live in or rent it out. Many buyers became landlords and purchased landlord insurance to feel secure and look after their newly acquired assets. In early 2000s buy to let market experienced a real boom, comparably to the 1990s when loans taken for buying a property, which meant to be let, constituted 1% of all the loans landed. in 2006 however the same loans constituted 9% of all loans landed in the market. Conclusion seemed to lead to welfare, but the reality was and is different.

The true is that mortgage lenders were offering very beneficial loans available for almost everyone but at the same time house prices were continuously going up so people with low incomes couldn't really afford buying a house. In 2003 British Government made a research which showed that there was a lack of supply in housing market as well as it was necessary to build new houses in order to match the household formation.

At the moment buy to let market is a very good chance for those with cash or those who still easily can get quite rigorous mortgage and become a landlord, as letting out the property in the times when people can't afford purchasing their own house and tenant demand goes up, can bring to property investors lots of benefits. Once you are a landlord it's strongly recommended to insure your property as any future claims can be paid under your insurance regardless of your own financial situation. Landlord insurance will help you to run your business without unnecessary risks.

All in all, the recession is a result of a few very important microeconomic indicators which need to be balanced otherwise financial market may lose its stability. Let's just hope we have learned our lesson and won't let our economy to be hit by yet another downturn.


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