Magoosh GRE

Housing market dissertation1 JM May 21

| March 4, 2015

1.1. Introduction to the study
London’s economy consistently out-performs other UK regions, and as a city it is attested amongst the world’s most dynamic performers (Oxford Economics, 2011). This is discernible from its globally connected core business and financial drivers which grew by approximately 6% per year during the decade prior to the global financial crisis (Oxford Economics, 2011). Nonetheless, the city remains a long way from being immune from economic downturns, for example, London’s annual growth in output declined by 1.5% in the second quarter of 2011 (Experian Economics, 2011). The latter is testament to London’s reliance upon those activities that are most likely to experience the direct consequences of an economic crisis brought on by a credit freeze. Finance and business, and with particular relevance to this study, the housing sector, rely upon buoyant credit driven consumer demand, rendering the city’s economy highly vulnerable to the adverse economic and social consequences of the credit crunch (Poynter, 2008).
The rapidly transformed financial landscape emergent from the global financial crisis ushered in a number of pertinent implications for residential property development and investment. This is the onus bearer for reigniting the discourse on the link between housing and the business cycle emanating from the consideration that housing is an important instrument for measuring the health of the economy (Leamer, 2007). In truth, housing is often referred to as the “engine of the economy” (Sander, 2008). Indeed, on a national level, following more than a decade of economic growth aligned with unprecedented growth in the property market, analysts had been forecasting a downturn in the UK, citing that the rise in property prices was unsustainable. For example, depending on the choice of index, the compiled data sources reveal average property increases from £75,000 in December 1999 to just over £182,000 in December 2007 (Nationwide House Price Index, 2012); or even steeper growth in the equivalent timeframe from £77,000 to £196,000 (the Halifax House Price Index, 2012). Despite these discrepancies it is plausible to interpret the pronounced upward trend as representative of the national housing marketing before the downturn.
Bearing in mind the regional focus of the study, it is necessary to furnish the discussion with a depiction of the property condition in London. To draw first on data compiled by Nationwide, the indication is that London displayed the largest regional average property price increases from £130,598 to £303,739 between 1999 and 2007. The corresponding data from the Halifax illustrates a comparable performance of £142,000 to £301,817. Thus, an almost threefold increase is discernible from the boom climate of the London housing market.
It is apparent that aggregate homeownership rates increased significantly over recent decades. Acquiring a deeper understanding of the factors driving these trends is invaluable, given the potential consequences of home homeownership for economic performance. As such a number of authors argue that a large proportion of the variance in house prices over time are explainable by economic and demographic factors. For example, models of the UK housing market illustrate that prices go through alterations relative to real income, the number of households, future income prospects, population trends, credit availability and the cost of borrowing (Meen, 2006; Muellbauer and Murphy, 1997; HM Treasury; 1992; Drake, 1993). However, the raised availability of mortgage finance to a wider section of the population facilitated by riskier lending practices appears to occupy dominant citation in the recent literature for enhancing homeownership tenure choice, thereby increasing the demand for housing and therefore, house prices (Adair, et al, 2009).
The above thus, lends support to scholarly arguments that “the growth of homeownership is one of the most significant social changes of the twentieth century” (Stephens et al, 2008; Doling, 2010; Forrest et al, 1990; Forrest et al, 1999; Stephens, 2008). In London the latter is exemplified by a homeownership tenure which stood at 56% in 2007 (Communities and Local Government, 2008). Nonetheless, London also exhibited the highest levels of households in the private rented sector (20%) and an equally highest number of households in the social rented sector as the North East (24%). Perhaps, on the one hand illustrating property to be an investment asset, characterised by private investors, who purchase residential properties for capital gains as house prices rise over time (Ball, 2006); while on the other hand, high social housing may suggest a social marginalisation of a section of the population unable to proceed beyond this sector (Percy-Smith, 2000).
Needless to say, an important pillar of a well-functioning housing market and imperatively the principle ingredient in an expanding house ownership economy is the provision of housing finance (Warnock and Warnock, 2008). Arguably, while there are many interrelated aspects of the housing market the provision of housing finance must be addressed before the market can sustainably provide adequate housing (Warnock and Warnock, 2008). For the average individual buying a house is a major purchase that most can seldom afford to buy outright – considering that average house prices range from between four to eight times annual income in developed countries (Ball, 2003). Therefore, such purchases are only affordable when payments are spread over time, that is, through the provision of a mortgage.
It is plausible to argue that the deregulation and liberalisation of mortgage markets, beginning in the 1980s, not only unleashed competitive pressures from non-traditional lenders but forced players to provide improved pricing and to extend the range of services offered to households (Cardarelli, 2009). An evaluation of the London housing market appears to reveal that the effects of deregulation are in accord with increased housing transactions and rising house prices (Stephens, 2008). However, the risk choice trade-off has been skewed in the direction of risk by the ineptitude of the supply-side to keep abreast with demand (Stephens, 2008); therefore, causing many of the benefits of deregulation to be lost in higher house prices. Furthermore, liberalisation of mortgage finance also increased the systems sensitivity to global financial markets, for example, through interest rate change and financial shocks (Forrest, 2008; Henley, 1998; Stephens, 2008; Stephens et al, 2008).
Thus, the sudden, severe and prolonged reduction in the availability of loans, otherwise acknowledged as a “credit crunch” (Elliot, 2008) has negatively impacted the residential property market (Stephens, 2007). For example, reduced credit availability denotes increased difficulty for buyers to obtain mortgages, and those who find a lender are obliged to provide a relatively high deposit. The impact is experienced on all side, in that, reduced purchasing power implies that sellers are compelled to lower prices, but the market nonetheless is bound to a sluggish pace (Stephens et al, 2008). Moreover, although some homeowners have benefited from falling interest rates, the economic downturn connotes that many have been affected by repossession (Chartered Institute of Housing, 2012).
The credit freeze is a contagion infiltrating the entire mechanism of the housing system. For example, developers have found it difficult to sell new houses, so therefore, scale back on building projects. The latter is perforated with adverse consequences for the affordable housing sector, as well as private housing, and further exacerbates the difficulty of retaining skills and capacity in the construction industry (Schwartz, 2010). Additionally, housing associations can no longer use surpluses generated on a buoyant market to cross-subsidise their activities and many have lost access to advantageous borrowing facilities enjoyed before the recession (Schwartz, 2010).
The above overview of the residential housing market subsequent to the credit crunch appears to be somewhat applicable to the London housing market. For example, number of residential transactions decreased from 192,000 in 2007 to 102,000 in 2008, to a further decline of 95,000 in 2009 (ONS, 2010). In terms of average time on the market for property sales in London, the average house was on the market for 72 days before a sale in 2007; in 2009 this had increased to 171 days (Home.co.uk, 2012). In the same period house prices fell from £303, 739 to £298,216. Thus, the data appears to confirm that the economic crisis had a significant impact on the London housing market.
However, just as the capital underwent the initial shock of the economic crisis as projected by Adair et al (2009), London current appears to be leading the way to recovery. This is evident from data revealing that the average property price in 2011 was down by only 2.9% from the peak in the fourth quarter of 2007 (Mountain Investor Report, 2011). Importantly, elsewhere in the UK property prices were observed to be in decline. Such information highlights that the property market in London is very different from the rest of the UK. Indeed, Mountifield (2011) makes the assertion that a discussion on the housing market in the UK, entails talking about two markets: London and elsewhere. He details that the disparity relates to a number factors: first, London’s attraction of foreign buyers with enhanced purchasing power; and second, the high number of prime property located in London. For example, more than half of the twenty most expensive streets in England and Wales are in the Royal borough of Kensington and Chelsea (Mountifield, 2011).

1.2. Statement of the problem
The impact of the financial crisis on the real economy has generated a plethora of research and perhaps the one of the most noteworthy on-going debates relates to the velocity of government intervention to save banks, whilst other sectors of industry have been allowed to fail. Undoubtedly, a functioning banking system is crucial to economic prosperity, but the continuing uncertainty within the financial markets and the widespread contraction in credit availability, as banks have sought to repair their financial liquidity has exacerbated the downturn in the residential property market (Adair, et al, 2009).
According to Poynter (2008) economic activity in the UK decelerated sharply in the first half of 2008, reaching standstill by the end of the second quarter. This weakening was largely driven by a fall both in residential and business investment (Adair, 2009). However, as aptly captured in a report by Jones (2012) by virtue of its economic dynamism, as a global centre for business and finance, London is set apart from the rest of the UK in being the first to experience the impact of financial economic downturns and simultaneously is pivotal in the recovery process. Elaborating further Jones (2012) contends that due to globalisation over recent decades and London’s prominent position as a global city, it plays a dominant role in, and is a key driver of the UK. Nevertheless, it is this same position that dictates its vulnerability to international crises. With London occupying such a prime position and the evidence demonstrating that its residential property market was firmly hit by the economic downturn, it stands to reason that the capital is a deserving area for examination regarding the impact of the economic crisis on the respective market.
Academic works have analysed the extent of the economic downturn on the UK residential property market (Adair, et al; Poynter et al, 2008; Stephens et al, 2008), but few, if any have devoted a specific study to addressing the London context, therefore this work is an attempt to fill this gap in the literature. The intention is to stimulate an enquiry into the interconnectivity of the financial market functionality, economic prosperity and the residential market performance.

1.3 The significance of the study
The study addresses the impact of the economic crisis on the residential property market in London. In seeking to obtain an adequate response from this investigation the work views housing in terms of demand and supply to comprehend and uncover the distortive influences in the market in relation to credit rationing, government regulations, constraints on supply and patterns of ownership (Harrison, 2002). At any one time, one aspect of the housing marketing is restraining it from achieving equilibrium. In this sense the study focuses on how the financial consequences of the economic crisis have impacted buyer demand, seller supply, and also on a wider scale, how the supply of land is a binding constraint, working against price falls and therefore the issue of affordable homes in London.
Thus, the intention is to establish the depth of the economic downturn on the residential property market from the onset to the current period. Previous studies have concentrated on the overall national impact of the economic crisis, but to the knowledge of the researcher, few if any have sought to evaluate the impact solely on the London housing market. Therefore, the work will serve to add to the literature in the field of economic downturns and residential property markets. The recommendations are envisioned to bring together key interpretations on future direction of the residential property market.

1.4. Research aims and objectives
The study focuses on the impact of the economic crisis on the residential housing market in London. Research reveals that any study formation must be directed by research aims and objectives in order to enable the inquiry (Bryman, 2001). Therefore, guided by this general principle, the following aims and objectives were designed to accomplish the study:
• To review the extant literature on the impact of the economic crisis on the London and UK residential property market

• To assess the extent of the economic crisis on the London residential market

• To demonstrate if London’s position as a global financial city dictates its vulnerability to economic crises in the residential property market, as well as serve as an enhancement for recovery.

1.5. Limitations of the study
The essential focus of the study is to investigate the impact of the economic crisis on London residential market. To achieve the latter a comparative analysis with the rest of the UK is included within the study, but the purpose is not engage in a holistic investigation of the country, as may be expected in research of this nature. Importantly, the time and research constraints do not afford this opportunity. Thus, this study is only devoted to a detailed account of London housing market.
Perhaps, of greater importance is the utilisation of secondary data in the research. In the first instance there are many advantages and disadvantages to the use of secondary data. The convenient advantage in this study was cost and time. The time period and resources allocated to the study did not enable surveys to be conducted or facilitate the collection of other types of information.

1.6. Dissertation structure
This dissertation comprises of six chapters. The first chapter introduces and presents the orientation of the study as well as outlining the research aims and objectives intended to guide the research. Chapter two undertakes a review of the extant literature, identifying the relevant theoretical arguments and empirical findings in order establish the effect of the economic crisis on the London Housing market. Chapter three describes the overall methodology used in the data collection for the research. Thereafter, chapter four analyses the enormous data collected with the principal view of presenting the findings that emerges from the analysis of the data collected. Chapter five undertakes a discussion and brings forth feasible recommendations for improvement and suggests other opportunities for further research discovered during the study. Finally, chapter six concludes the study

2.0. Literature review

2.1. Introduction
This chapter aims to develop a strong theoretical foundation for the study, and to set out a framework for the data analysis. In order to do this, a study of existing literature will be set out. The aim is to look at what previous researchers have written on the topic and related areas. The ways in which these relate to the current study will also be set out.
This chapter starts by looking at the current economic crisis and how it has been understood, then moves on to consider the different definitions of the term ‘credit crunch’ in order to analyse the recent events better. Next, the focus moves to literature concerned with the recent economic crisis, and particularly how it impacts on the residential property market. Subsequently the chapter looks at different theories involved in this area, for example the mechanisms behind the housing bubble and supply and demand theory. The remainder of the chapter looks at residential property in London before and after the economic crisis. Finally, a conceptual framework is suggested, which will act as a structure for the rest of the study.
2.2. Introduction to the study
In the UK, a number of new financial measures over the previous 10 years led to several consequences. There was a substantial boom in the financial sector. Additionally, low interest rates led to unprecedented growth in the UK housing market. In other words, the accumulated value of privately owned housing increased substantially, and additionally refinanced mortgaged debts saw big increased in funds released from the increased value of houses (McCarthy and Steindel, 2007). The boom in house prices was followed by a significant financial and economic crisis. This had a devastating effect on the UK, indeed the global, economy, and (it has been claimed) brought a stop to ever-increasing house prices (Duca, et al 2010; Jackson, 2009). There are plenty of examples in the literature of arguments that the role played by housing and housing development was critical to the development of the recent crisis in the global financial markets. Since the start of the financial crisis in August 2007, there has been a near-full halt in the flow of credit (McCord et al, 2011; Hodson and Mabbit, 2010).
However, for the most part, the literature concentrates on national level analysis of the economic crisis on the residential property market; regional analysis has received far less attention, despite the fact that the UK displays great regional diversity. In terms of property prices authors such as Holly et al (2010) demonstrate that London is a dominant region for the rest of the UK, having witnessed quadrupled property price increases between 1996 and 2006, and while property prices elsewhere in the UK have continued to fall or stagnate since the financial crisis, house prices continue to rise in London (Lambert, 2012). This study considers the latter phenomenon as warranting further investigation to glean an understanding of the economic crisis impact on the London residential property market.

2.3. Conceptualising economic crisis
The emergence of the 2008 economic crisis stimulated a proliferation of research primarily on the causes (Crotty, 2009, Jickling, 2010), development (Sumner, 2010), its effects spread over diverse sectors and areas (Suhrcke, 2011; Smeral, 2009) and suggestions for solutions (Rasoulinezhad, 2011, 2012; Essien, 2011; Ahmed, 2010). However, these contributions have not simplified the undertaking of attaining an adequate definition that fully encapsulates the fundamental make-up of an economic crisis. Indeed, Grewal and Tansuhaj (2001) explicate that by reason of being linked to the concept of business cycles, economic crises have continued to befuddle scholars since the beginning of the nineteenth century. Furthermore, it is problematic to predict and effectively measure the influence of economic crises because they refer to contractions, rather than to periods of slow growth (Grewal and Tansuhaj, 2001).
Adopting the perspective that economic crisis constitute shock factors in the real economy, Calomiris et al (2010) illuminate three categories of crisis-related shock: reduced global product demand, contraction in the supply of credit and selling pressures in equity markets. Grewal and Tansuhaj (2001) also suggest that economic crises can be partially defined by “con-movement”: the process whereby a high number of macroeconomic indicators (including high inflation, high unemployment, unstable currency and reduced outputs) are present. Leung and Horwitz (2010) further suggest that while recessions occur only infrequently, they can have devastating effects on investments due to their timing and the extent of their seriousness.
Considering the nature of the study applicability is found in the definition supplied by Bordo and Jeanne (2002) highlighting losses in the value of important assets, such as stocks and houses. These assets represent an important part of the balance sheet of households and firms, so that a drop in their value may constitute an interruption in the flow of finance as lenders fear the value of the collateral that the borrowers have to offer.

2.4. Definition and origins of the credit crunch
The term “credit crunch” is a fairly recent addition to the vocabulary of financial crisis. Adar et al (2009) point out that the phrase has emerged from common usage, and came into existence from late 2007 subsequent to problems in the global financial markets. On the other hand Boervers (2009) suggests a simple definition: a ‘credit crunch’ occurs where the availability of credit is reduced. However, despite the appealing simplicity of this definition, there is some debate regarding the causes of reduced credit availability, with a reliance upon anecdote rather than deep analysis (Owens and Schreft, 1995).
In their study of the 1990-1991 recession, which was also followed by a crack-down on available credit, Bernanke and Lown (1991) suggest that a “credit crunch” could be defined as “a significant leftward shift in the supply curve of bank loans, holding constant both safe real interest rate and the quality of potential borrowers”. This definition assumes that credit crunch is something which originates from the supply side (banks) rather than from the side of demand (that is, from borrowers). By contrast, Hubbard (2008) offers a more comprehensive definition, suggesting that a credit crunch is “a decline in either the ability or the willingness of banks to lend at any particular interest rate”. Hubbard’s definition, unlike that offered by Bernanke and Lown (1991), incorporates the idea that attitudes and actions of potential borrowers may contribute to the subsequent economic problem. According to Boervers (2009) both definitions allow for the existence of other, external, factors including increased regulations and credit controls. The first definition leads to a conceptual shift whereby bank loans are central: according to the second, the problem arises from a decline in the ability of banks to lend.
2.4.1. Origins of the credit crunch
There is general agreement amongst authors that excessive and imprudent lending by banks led to the credit crunch, together with the consequent increased threat of defaults across the board by sub-prime borrowers, and the decline of the sub-prime market in the USA (Bourke, 2007; Longstaff, 2008; Sharma, 2009). Brunnermeier (2008) tries to explain the mechanisms in the world economy which led to mortgage market losses and to the subsequent turmoil in the wider financial markets by reference to the phenomenon of contagion, whereby shocks in one area impact upon others and eventually create global turmoil (Allen and Gale, 2000; Kyle and Xiong, 2001; Kodres and Pritsker, 2002; Kryotaki and Moore, 2002; Brunnermeier, Pedersen, 2005, 2007).
It has been highly debated whether the credit crunch actually caused global economic crisis in 2007/8, or whether it was simply a trigger. Adair et al (2009) put forward the view that it can be seen as a symptom of a much deeper and complex issue, one which can be traced back to the age of liberalisation during the 1970s and the following financial liberalisation of the 1990s. This period saw the development of a new financial movement, whereby banks were encouraged to offer risky loans. During this time, the rule of applying the three “Cs” to each borrower – Collateral, Credit history and Character – was waived (Adair et al, 2009). Edmunds et al (2010) look at the way the sub-prime collapse has effected the UK economy. They suggest that what started when liquidity was withdrawn in late 2007 only effected banks initially. However, as banks such as Northern Rock started to have huge losses, the crisis spread wider. This point of view backs up the contagion theory. This view of the turmoil is backed up by Aretis and Karakitsos (2009) who also point out the impact on the economy in terms of tightening lending criteria, increased living costs, less available credit, saving rather than spending. All these phenomena, they suggest, point to the fact that the mortgage consumer market had been severely affected.

2.5. Definition of residential property
The focus of this study is on residential properties; therefore, it is imperative to provide a working definition for the purpose of avoiding confusion with other types of properties. The most obvious authority on the subject, HM Revenue and Customs (2012) defines a residential property as “a building that is used or suitable for use as a dwelling”. Additionally, the definition includes land which is, either in whole or in part, the ground upon which residential property is built, where that land is used (or intended to be used) for a purpose to do with the way the building is employed. Renhart (2007) offers a more explicit description affirming that a residential property is anything that can be lived in, that has mains services connected such as electricity, water and gas.

2.6. Housing as a commodity
Alhashimi and Dywer (2004) suggest that it is important to look at the way the housing market can be modelled, and that this can be done from both a social and an economic point of view. In fact, housing is best seen from both points of view simultaneously, as it can be an investment vehicle as well as a place to live. Seen as an economical phenomenon, housing can be analysed in terms of conventional market theory. Under this, the purchase of a house is seen as equally an investment and something about which consumption decisions are made (Alhashimi and Dywer, 2004). From the social point of view, housing is a way to attain a number of positives including shelter, safety, privacy, warmth and independence (Alhashimi and Dywer, 2004).

2.7. Economic crises and impact on residential properties
Holbrandt (2011) identify residential property as one of the principal components of household wealth and interprets price developments in the residential property market as being closely linked to the real economy and the financial sector, and thus the business sector. According to Assenmacher-Wesche (2010) this is particularly evident in the recent global financial crisis, where residential property investment booms had the effect of increasing vulnerability to decline in property prices. Furthermore, besides being a contributory factor in economic fluctuations, Mishkin (2007) note one of the central variables in the mechanism whereby money is transmitted is housing. This is based upon the idea that housing is a durable consumption good. As such, the value it holds is related to the discounted sum of future returns. This makes it very sensitive to changes in interest rates (Mishkin, 2007). In addition, using property as collateral produces a connection between house prices and aggregate demand (Mishkin, 2007).
It is widely held in the economic literature that the way monetary policy has an impact on economic conditions is a function of the way the financial system is made up (Mishkin, 2007; Assenmacher-Wesche, 2010). The way in which housing finance in structured is particularly important, because housing is generally seen as the biggest asset held by a household, with mortgages their biggest liability. Additionally, since house purchase typically involve household borrowing, house prices are likely to be strongly driven by credit conditions (Stein, 1995). However, of paramount importance is the connotation of housing marketing booms followed by busts, financial instability and significant cost to the economy, reflecting the prominence of the residential housing sector.

2.7.1. Housing boom and busts
For analytical clarity it is useful to review the empirical data substantiating the rationality for frequently implicating the housing market in episodes of financial instability. In illustration authors such as Crowe (2011) recognize the recent experiences of many Western nations including the US and the UK as an example of the ways in which sustainable housing booms changed nature and led to sizeable loss of outputs and crises in the banking system.
A study by Reinhart and Rogoff (2009) confirmed this. They showed that of the main episodes of banking crisis in recent history, 6 were associated with a housing bust. In addition, where recessions are linked with housing crises, they tend to be more severe than those which take place without being associated with a ‘crash’ in house prices.
Thus, it appears plausible to interpret the economic crisis and housing market as an interlinked causal relationship. For example, a direct manifestation of the banking crisis was a slowdown of mortgage availability and therefore a knock-on slowdown effect in the housing market, amounting to housing bust, which not only exacerbated the economic recession, but renders the recovery process all the more difficult (Crowe, 2011).

2.8. Housing bubble
Some researchers were prompted by the distinctive nature of the recent housing market boom to claim that there had been a ‘bubble’ in house prices (Shiller, 2005). However, in order to really get to grips with this issue, it is important to understand what the term ‘bubble’ might mean. McDonald (2010) gives one possible answer, suggesting that a ‘bubble’ occurs when housing prices grow at a rate which out-paces inflation, economic growth and also household income. He further suggests that a bubble comes about as a result of a number of factors including low mortgage rates, the easy availability of credit, net immigration issues with the availability of housing stock.
Nonetheless, despite seemingly acceptable descriptions of what constitutes a housing bubble these is contention in the literature as to its existence. For example, Powell and Holcombe (2009) illuminate three fundamental perspectives of bubbles assumed by economists. The first includes a number of factors, for example a tendency to deny that bubbles exist, for example suggesting that what is thought of as a bubble is, in fact, a function of ‘real’ factors. The second perspective is put forward by Keynesians as well as by adherents of the behaviour finance approach, and suggests that housing bubbles exist due to psychological factors, for example the “irrational exuberance” in which a mania for house buying develops, with beliefs such as the idea that house prices can only ever go up, not down. The third perspective derives from the Austrian school of thought perceiving bubbles as comprising of real and psychological changes caused by exploitation of monetary policy.
It is hard to explain the large variations in housing prices over time without using the notion of a housing bubble. For, example, according to Glaeser and Gyourki, (2008), it could be argued equally that values in 1996 were low, or that values in 2005 were over-inflated. Nonetheless, the empirical evidence in the literature remains inconclusive. For example, research by MacCarthy and Peach (2004) critically analysed the data and method commonly used to profess the existence of the housing bubble. Following adjustments of common housing market metrics (such as the ratio of median price of existing homes to the median household income) to take into consideration interest rate changes over time, the authors found little evidence suggesting that the U.S., for example, have had a housing bubble.
Regardless whether events in the London property market before and after the economic crisis are attributable to the existence of a housing bubble, or to fundamental changes in the market, the objective of this study is not to prove or disprove the existence of the bubble phenomenon but to establish the most appropriate explanation.

2.9. Theory of demand and supply
According to Driscoll (2000) aggregate demand is a downward-sloping relationship between output and price level, which is usually derived from a fundamental assumption about demand for goods and money. In other words, the extent to which consumers want to purchase at a particular price determines the demand level (Parkin, 2005). Nonetheless, this demand is also dependent on a number of factors at work in a combined manner.
Aggregate supply is the relationship between output and prices with varying slope, which is commonly derived from specification or production (Driscoll, 2000). Thus, the entire relationship is between the quantity supplied and the price of a good (Parkin, 2005). In the case of this study, the supply concept encompasses the components of society involved in putting up houses. Those who produce housing put together land with labour and capital, with an output of something which is marketable (Parkin, 2005). However, this does not alone determine housing quantity, which is dependent on several factors, which will be discussed in greater detail later.

2.9.1. The demand side
Bottazzi et al (2010) have shown that there is a variation in housing ownership both over the life cycle and also across cohorts. Attanasio (2011) says that this change is due at least partly to the way that personal requirements change over a lifetime and the way assets are accumulated. However, differences in the conditions of credit markets, variations in price and differences in levels of income also feed into these variations. The fact that the demand for housing changes over the business cycle is, arguably, of equal importance (Attanasio et al, 2001). To break down the arguments of the aforementioned authors, generally, the literature divulges changes in current and future levels of income, how interest rates behave, the confidence of consumers, how easily available is mortgage finance, demographic factors and pure speculation all affect the propensity of individuals to purchase and therefore, the market demand curve.

2.9.1.1 Income
A study by Attanasio et al (2011) suggests that demand for housing on the part of individuals can be related to the housing price process, the process of income, and the extent to which mortgage associated borrowing constraints are tightened or loosened. They found that the level of house prices and earnings are significantly associated with behaviour changes. When incomes assume an upward trend the demand for housing increases, however, it was also confirmed that when prices of housing increases, this leads to demand falling. Thus, finding consensus with an earlier study by Bogart (1988), the most important aspect concerning demand is the elasticity of demand with respect to price and income.

2.9.1.2. Interest rates
Mishkin (2007) and Bernande and Gertler (1985) exemplify in their survey of the literature that when interest rates are lower, the opportunity cost of buying a house is decreased, and the demand for houses is increased. Furthermore, a number of studies demonstrate that reducing interest rate level leads to an increase in housing collateral value through a mechanism of increasing the future user costs’ discounted value. Consequentially, the capacity of the borrower’s for debt, and subsequently the demand for housing also increases further, which leads to an even bigger increase in house prices (Iacoviello, 2005; Calza et al, 2009).

2.9.1.3. Consumer confidence
A study by Davey (2004) designed to analyse the effect of consumer confidence on overall consumption levels revealed that changes in levels of confidence are closely related with levels of annual consumption. This was tracked over the past 30 years.. This finding can be interpreted as bearing great importance in the observation of how consumer confidence affects house prices. The latter is further confirmed in studies by Berry (2004) and Heim (2010) who have shown that when consumer confidence is high, expectations with regards to the housing market is also high, thus, enhancing the confidence to acquire riskier mortgage loans.

2.9.1.4. Demographic factors
The literature reveals that demographic factors have an impact upon housing demand. Such factors include the age structure of the population, how households are made up, and migration statistics. In an innovative study conducted by Mankiw and Weil (1989) demand was directly linked to demographic factors (age) by first estimating cross-section demand equation on data from the 1970s census. A time series variable was constructed in the explanation of real house prices. The results found age, and thus demographics are a large determinant of actual house prices, which prompted Mankiw and Weil (1989) to forecast plunging property prices in the 1990s. In fact, the opposite occurred. Actual prices increased by 3% per year between 1987 to 2004.

2.9.1.5. Speculation
Shiller (2008) pinpoints speculative activity among investors incorporating extrapolative expectations and market psychology in the form of optimism and pessimism as a primary element in the determination of housing prices. Perhaps, the best example to illustrate the latter argument is captured in the observation of Ferrari (2007) that a large percentage of the houses which have been purchased over recent years have been bought to let out to tenants. This suggests that investors invest in residential properties when prices are on the increase, and sell them when the market seems ready to fall. This leads to a particularly volatile housing market, as investors buy in boom and sell in bust.

2.10. Supply side
The quality of land and its price as well as other inputs to housing production relate to the aggregate supply of housing (Fingleton, 2008). In the short run the supply of housing is essentially the existing standing stock (Fingleton, 2008). However, Stephens (2011) identifies that unsustainable house price booms reside with an underlying shortage of housing in the UK. It is calculated that the relationship between the supply of housing and demand for it is the main way in which prices are determined in the long-term. In the UK, there is a lack of housing supply, a situation which has been created over some years of failure to invest in new stock (Stephens, 2011). The reason for this is found in the analytical work of Audre (2010) attributing increasing demand for housing to a healthy growth in income, and an increase in mortgage lending, with a decline in interest rates and a relaxation of the criteria for lending. The tax system also encourages investment in housing, with a favouring of ownership over alternative forms of tenure. Additionally, there is a very restrictive use of land allowed by UK planning policy, which has helped exacerbate the mismatch of supply and demand as well as increasing the shortage of housing and making it less affordable (Andre, 2010)
There are a number of studies illuminating some of the things which can effect prices over the long-term. For example, Malpezzi and Mayo (1997) constructed a study to show the effect of regulations on market prices in a study which compared the U.S, Thailand and Korea. The results revealed that “countries with more stringent regulatory environments have less elastic supply of housing”. Indicating that such study results translate over into the UK context, Bramley (1993) and Pryce (1999) both hold that developers do not favour building upon brownfield land. They suggest that the new quotas in the UK to encourage development on brownfield sites actually works to reduce the responsiveness of the building trade.
2.11. Mortgage lending
According to McCord (2011) there was an extensive range of mortgage products available to consumers throughout the boom in housing, with products including self-certificate mortgages and high loan to value (LTV) ratios (in excessive of 100%). This, he suggests, made home-ownership available to wider sections of the population. Furthermore, Adair et al (2009) notes that the loan to income ratio were extended, facilitating borrowers the opportunity to gain the ability to access larger volumes of finance for mortgages, especially between 2005 and 2007, the period of a rapid expansion globally of available credit (Adair et al, 2009).
A recent IMF (2011) report makes the identification that housing boom and bust are closely related to provision of credit. The diagnosis is in alignment with recent economic studies suggesting a strong positive correlation between short and medium-term changes in housing finance markets and growth in volatility in house prices. Confirming this association Andrew (2010) found that financial deregulation in mortgage markets has caused a “notable increase” in effective demand and real house price. House prices have risen, in the average OECD nation, by up to 30%. This suggests that the relationship between the growth in mortgage credit and high house prices are intricately related (IMF, 2011).
A noteworthy research by Crowe et al (2011) illustrated that “almost all” countries with twin boom in housing and credit markets (21 out of 23) eventually suffered from either a financial crisis or a critical drop in GDP growth rate relative to the country’s performance in the 2003-2007 period. Just over half of the countries suffered from both damage to the financial sector and a sharp decline in economic activity. In contrast, of the seven countries that experienced a housing boom, but not a credit boom, only two went through systematic crisis, and on average, had relatively milder recessions (Crowe et al, 2011).

2.12. London residential property market before the economic crisis
Westerhoff (2009) records that between 1996 and 2008 real house prices in London nearly tripled. Indeed, as identified by Vermeulen (2009) house value in London is amongst the highest in the World. To illustrate, Vermeulen (2009) draws on the example of up-market Kensington and Chelsea, where the average property price stood at £4.3 million. Acknowledging that Kensington and Chelsea is extraordinary where property prices are concerned, it is noted that house prices are also very high in areas traditionally thought of as lower class and marked by poverty. For example, the price of a similar house in the borough of Richmond during the same period was £1.2 million, while in the borough of Hackney, currently undergoing transformation, a comparable property was £767,000. Nonetheless, high property prices did not deter buyers which are discernible by the frequency of residential property purchases (Vermeulen, 2009). Ellis (2010) attributes upward trends to strong property investments between 2004 and 2007 as being fuelled by a combination of increasing supplies of cheap debt and a influx of investment from private investors who are diversifying from other asset classes. Thus, it can be interpreted that the London residential market was seen as an important source of investment for investors speculating on short-term capital appreciation.
Approaching the housing market from a supply perspective, with the aim of exploring the high levels of house prices volatility in England, Barker (2004, 2006) and the OECD highlight the inflexibility of the planning system. Historically, it is considered that the planners have failed to take into account signals from the market, and have not coped with changes in socio-economic conditions. Although, not empirically tested, it is suggested that this rigid supply is a significant factor of Britain’s very volatile house prices, particularly in London.
Taking all of the above into consideration, it is also essential to draw on the defining credit availability conditions of the period as identified by McCord (2011) as being the primary element that fuelled property demand in London and the rest of the country. However, to this must be combined with increased income levels (Attanasio et al, 2011) and hence enhanced consumer confidence (Davey, 2004).

2.13. London residential property market after the economic crisis
Following the economic crisis a study conducted by Ellis (2008) reported that residential property prices experienced significant falls in transactions levels. Confirming this trend, Drivers Jones (2009) further records that the London property market witnessed some of the major impacts of the credit crunch with falls in rent and capital value. For example, property prices fell by 16.1% in January 2008 to May 2009 (DTZ.com, residential, 2011).
A number of other bodies, including the Royal Institution of Chartered Surveyor (RICS, 2008), verify that London was one of the worst hit areas of Britain for falls in housing transactions. For example, in September 2008 the RICS indicated that the national figure for transactions was less than one per surveyor per week. However, in London the figures were much lower, with chartered surveyor estate agents averaging only eight sales over the three months leading up to September 2008 (RICS, 2008). The RICS attributed this fall in transactions to a lack of mortgage finance.
More recently, the London housing market has begun to experience a revival. For example the Global Property Guide (2012) suggests that a principal feature of the UK housing market is location in the identification that London has experienced positive growth in house prices during 2011. The south of England, by contrast, had slight falls in prices, while the midlands as well as the north suffered greater falls. However, according to the estate agent Knight Frank (2012) much of this revitalization is being led by enhanced interest in prime central London properties, which now stand at £3.2 million, with price growth up by 12.6% in 2011. Propertywire (2012) records that this picture is not reflected across the whole of London, for example, house prices in less wealthier areas contrast greatly with the latter. Most notable is Tower Hamlets, which documented the largest fall of 22% from 2010.

2.14. Conceptual framework
The sections above have introduced a number of ideas about traditional housing theory, and theories of supply and demand. At the same time, the literature review has shown that the main driver of the demand for housing within London is the low supply of housing stock. From these observations the study acknowledged the theory of demand and supply as a useful conceptual framework to guide the study in the attempt to illustrate the impact of the economic crisis on the London residential property market. The rationale is based on the idea that both demand and supply side factors have an effect on the London market for property. This illustrates what seems to be one of the most important drivers of house prices, even at a time of economic crisis.
2.15. Summary of the literature review
This chapter provided definitional clarity of the terms economic crisis and residential property, housing bubble and demand and supply. Moreover, the chapter analysed the related literature underpinning the concepts. Additionally, a research account of the London residential property market before and after the economic crisis was imparted. In conclusion, the chapter above has set out a conceptual framework which will be used to build the remainder of the study. The next chapter sets out the research methodology.

3.0. Methodology

This chapter explains the methodology used throughout the study, and also explains the rationale behind the approaches which have been used. The aim here is to explain why the chosen methodology was best in terms of the given research aims and objectives outlined in chapter one. The chapter also looks at the research philosophy, or overall approach to the subject area and explains the research strategy. The ways in which data were collected and analysed are covered, looking at data collection and analysis and considering issues of reliability, validity and generalizability. Finally, the research limitations are examined.

3.1. Research philosophy
For this study formulating an overall research strategy was the option between two principle alternatives, a positivist or an interpretativist philosophy. This is not to imply that only these two extremes exist but that these two paradigms are definitive of opposite ends of the continuum. Therefore, while a research may utilise either a positivistic or interpretative approach, it is equally conceivable to employ a combined paradigm (Creswell, 1994)
Given the nature of the research outlined in chapter one, the interpretativist epistemological paradigm was considered to be the most appropriate fit. The latter is founded on the assumption that the social world is a subjective assembly of individual human beings, who through daily interactivity generate and sustain a social world of intersubjectivity shared meaning (Manneheim, 1997, Schwandt, 1999). Therefore, there is a suggestion that the world as we perceive and understand it is not an objective given but rather a construct dependent upon individuals and societies’ perceptions. This in turn leads to the view that research itself has only questionable objectivity: social phenomena need to be seen in the light of the contribution made by the individuals investigating such phenomena. That is, it has been widely suggested that researchers cannot be completely objective, because the research questions, data investigation and conclusions need to be framed within one or more researchers’ conceptual orientation (Hussey and Hussey, 1997). Positivism takes a different perspective, suggesting rather that objective knowledge of reality is possible, and that it is free of the values of the researcher. In other words, reality is independent of human “consciousness and cognition” (Orlikowski and Baroudi, 1991; Levin, 1988; Fischer, 2004). For the positivist, reality is long-lasting, stable and can be accurately observed and described without changing the phenomenon being examined.
The designated phenomenological perspective related to the exploratory nature of the study in evaluating the impact of economic crisis on residential property in London. Furthermore, in seeking to understand the phenomena, the interpretivist paradigm serves as the facilitator for cross-examining the demand and supply construct relative to the economic crisis and residential property trends in London. This made it possible to determine the factors and variables which are involved in the framework which links demand and supply in the housing arena, and also possible to postulate what the relationship between these variables might be. The study, by starting to map these relationships, opens the possibility of further investigation by later studies.

3.2. Research approach
In this study a qualitative approach is assumed to facilitate a comprehensive understanding on the information gathered and problem under investigation. It denotes that researcher study the things in their natural environment and give meaning to the research by accepting the suggestions of other people.
The first stages of the design of this research project offer a way of better understanding the ways in which the recent economic crisis have impacted the London housing market. To accomplish this it was the objective of the researcher to search for numbers to indicate trends and rely on observations, characteristics and interpretations from studies previously conducted. Thus, it is considered appropriate to employ a qualitative design, which is taken to study real world intervention.
Two further fundamental research approaches are required to be taken into account. These are identified as deductive and inductive methods. The deductive approach denotes the context where the researcher deduces projected propositions based on general theories, which are verified through specific situations and observations, thereby substantiating the final outcome (Kent, 2008; Babbie, 2010). The inductive deviation is grounded on the rule of developing theories subsequent to the collection of data (Saunders, Lewis and Thornhill, 2003).
To assist the investigation into the extent of the economic downturn on the London housing market, this study uses a deductive approach. That is, the starting point for the research is a review of existing literature, looking at both empirical and conceptual studies. Additionally, this study uses a conceptual framework which offers a foundation for the conclusions drawn.

3.3. Research strategy
The study is governed by an interpretativist paradigm based on secondary sources of information. Secondary data is descriptive of data that has already been collected, organised and condensed (Israel and Glenn, 1993). Normally, assuming optimum conditions, secondary research offers a way of gathering information which is useful to the research questions under investigation as it throws light on general concerns. It can offer a cost-effective way to understand the ideas behind the research question. At the same time, secondary research helps with the design and development of primary research studies, as it can help researchers investigate key concepts and review studies already carried out.
3.3.1. Justification for the use of secondary data
The current study uses only secondary data. This was the approach chosen for a number of reasons. The advantages of secondary data include the immediate availability of the data, cost-effectiveness and the provision of an important foundation for comparison with primary research (Kennet and Salini, 2011). Secondary data can often yield more accurate data than that of primary research. Given that data already exists, the need to carry out time consuming and costly research procedures is eliminated. This frees up time for a more detailed and considered analysis of the sources used.
The interpretation and analysis of secondary data is a less demanding and complicated process. Therefore, with reference to the current study obtaining secondary data was more convenient since the information was in a useable format, having been previously organised and condensed. Thus, although the time period allocated to the study did not permit surveys to be conducted or facilitate the collection of other types of information, the time saved by the use secondary data afforded the researcher the opportunity to spend a greater amount of time analysing the data.
A further reason for the use of secondary data is that distinct from the rest of the UK, the London housing market has always attracted significant attention for its uniqueness, and hence the wealth of statistical information available on the performance of the market. It therefore would seem plausible to examine such data before and after the economic crisis for the effect of the latter occurrence.
There are many benefits to using secondary sources, however it is also necessary to acknowledge the shortcomings. Kennet and Salini (2011) document five main problems associated with secondary data sources: First, is caution for researchers to pay close attention to definitions used in data collection; Second, sample errors, which may relate to statistical sampling theory and sample representative; thirdly, there is a possibility of bias in the sources used, therefore the researcher has to take extra pains to be aware of any hidden or vested interests at play. A fourth problem concerns the reliability of the data. How big was the sample? What was the response rate? Are there any biases built into the questionnaire at design stage, and how was the data analysed? Finally there is an issue of coherence, that is, data collection procedures affect data comparability over time. Bearing mind the above drawbacks the researcher utilised secondary sources to obtain data for the analysis.

3.4. Data collection
To facilitate the study data was collected from various sources including government documents relating to the effect of the economic downturn on the housing market, as well as information from reputable organisations such as the Office for National Statistics, Greater London Authority (GLA) annual reports, the Royal Institution of Chartered Surveyors and Land Registry. The research utilised numerous academic journals, including:
• Journal of Housing Research
• Journal of Economic Perspectives
• Urban Studies Journal
• International Journal of Housing Policy
• Housing, Theory and Society
• International Journal of Housing Markets and Analysis.
The articles for the analysis was located through searches in key electronic databases relevant to housing, comprising of JSTOR, Emerald, EBSCO, Business Source Premier, Datastream, Interaconnect, Elsevier and Sage Journals. A hand search of the literature was also carried out which was guided by a key informant in the field. Journal titles were searched using key words such as “economic crisis”, “financial crisis”, “credit crunch”, “housing market”, “London housing”, “London housing market”, residential property”, “London residential property”. These words and phrases were used in combination to generate a list of relevant articles and text books. Additionally, single keywords were also used. In case these searches failed to provide enough research material, the reference lists of key journal articles were also used to generate more material. An inclusion and exclusion criterion critical to the implementation of the study was put in place to achieve search returns most relevant to the study (see table 1).

london

By using these inclusion and exclusion criteria, it was possible to define a location and a timeframe. Even using these search criteria, however, there were certain gaps in the research material. These gaps were filled by use of data data from other information sources, for example, Datamonitor and the Economist Group.
It should be noted that official statistics may be subject to data gaps to inaccurate information and to issues due to timely reporting. They may also show inconsistencies and be unreliable (Novak, 1995). One possible reason for this is given by Gerrard (1993) who suggested that the sheer size of official surveys means that those employed to work on them often lack the skills necessary to carry them out properly. This leads to error on a wide scale, and to irregularity. Additionally Gerrard (1993) says that the areas covered by these surveys are often very large: because of this it is impossible to effectively manage the research process and draw conclusions from it. It should also be noted that restrictions of time and place mean that precise reporting of statistics are often further flawed.
The researcher on the current study took these restrictions into consideration. She decided to triangulate the study, also using data from supplementary sources. This allowed the reliability, generalizability and validity of the data collected to be improved. In order to do this, the study used a number of other sources, for example the national media and internet sources with an interest in the London housing market. By allowing a broader range of sources, for example including the daily newspapers, the researcher was able to gain an additional insight into the wider impact of the economic crisis and the views of the wider public on the London residential property market.
The researcher also used the university library as a source of information for the project. Here she was able to get in touch with a number of experts with an interest in the topic area. She was also able to set up consultations with research agencies, which allowed considerable clarification and feedback on the study. These consultations played an important part in the study, improving quality and addressing issues of validity and reliability.

3.5. Reliability, validity and generalizability
Hussey and Hussey (1997) state that reliability means the extent to which the results of research can be replicated in the future. In other words, when a research study is repeated, the outcomes should be similar.
In terms of this research study, the main objective is to assess the impact of the economic crisis on the London housing market. If the study is to be reliable, it should be possible for another researcher, adopting exactly the same procedure, to achieve the same results. This should certainly be the case, because the method used here consists of a summary of and development from existing data. If another study used the same methods, the same conclusions would be drawn, meaning reliability is high. Moreover, in order to further boost reliability, the present study includes a highly defined conceptual framework which dictates the research approach. Further, the structures set out in the sections above in terms of finding and organising data have contributed to the overall validity and reliability.

3.6. Limitations of the research
Although a number of precautions were taken to avoid problems and ensure authenticity, there are some unavoidable limitations. It is also necessary to understand these limitations in order to fully contextualise the research process. One main drawback for this study was that electronic databases were used to gather relevant information. It should be pointed out that the databases omit certain publications: even if these include very relevant information they will not be returned as a result of online searches. As such, useful information might be excluded.
Another limitation is to do with the nature of secondary data. First, and perhaps the biggest limitation, all the studies used in this study were originally devised to answer a different research question. Because of this, the information they contain is not going to be as pertinent to the matter in hand as a primary study designed for this dissertation alone would be. One way of getting around this limitation is by using a wider number of sources, in order to gather the maximum number of views on the matter. It was for this reason that the current literature review was made as extensive as possible, in order to provide the best possible basis for future primary studies of the area.

3.7 Summary
The above chapter has looked at the methodology used for this study. First, an overview of research and objectives was presented, and the ways in which these influenced the methodology was brought out. Next, the reasons for selecting the methods used was discussed. Finally, more detail was given about the way the data was collected and analysed. The next chapter looks at the results of this data-gathering process.

4.0. Data analysis and findings
This chapter presents the findings and results of the data analysis that was conducted for the purpose of exploring the impact of the economic crisis on the London Market. According to Brink and Wood (2001) the function of the data analysis is to furnish the research question with acceptable and meaningful explanations.
4.1. Data analysis
The aspirations of the study were to explore and illustrate the effect of the economic crisis on residential properties in London. To fulfil the latter descriptive statistical analysis was employed to examine housing trends over the last fifteen years in line with mortgage lending, interest rates and the transformation brought about by the economic crisis. The statistic will be used to judge the overall impact of the economic crisis in the London housing context.
According to the literature review shifts in housing characteristics are observable in homeownership increases, which in turn impacts house prices through amplified housing demand resulting in housing volatility (Stephen et al, 2008). However, the operation of distortive influences ensure that the housing market can never be in equilibrium, government regulation constraints on supply and credit-rationing amounting to economic crisis appear to be among principle market distortions in the housing sector. To effectively test this notion relative to the London housing market it is considered appropriate to date the study from 1997 to the present for purposes of providing an indication of the housing situation before and after the economic boom. Furthermore, occasionally, throughout the discussion, to inform and correctly position London within the contextual framework it is of relevance to extend the analysis beyond the borders of London to the broader context of the UK.

4.1.1. Homeownership
Overall homeownership in the UK has seen dramatic increases over the last 30 years, increasing from 9.9 million in 1981 to 14.6 million owner-occupiers in 2008. The rate of growth is particularly pronounced from 1981 to 1991. It then levelled off slightly but still increased until 2004 when it started to stagnate in the mid-2000s. Nonetheless, representing 68.3% of all households in the UK, the latter illustrates that the majority of people aspire to this form housing tenure (ONS, 2009). Figure 1 provides the evidence for this, showing homeownership level to be far above that of the social and private rented accommodation sectortheFigure 1: UK housing tenure (Source: This is money.co.uk, 2012)
In the London context the different characteristics of the latter upswing and the boom and bust of the late 1980s and early 1990s is illustrated in figure 2. The movements in the key housing market and income trends show a degeneration of affordability particularly in the 1980s, partly attributable to the upswing in house prices but primarily because of the steep increases in mortgage repayments costs, insomuch as interest rates were sharply raised to tackle inflation. house

Figure 2: Trends in London earnings, house prices and mortgage repayments (source: Joseph Rowntree Foundation, 2011)

In contrast, the upward trend in homeownership from 2000 was counterbalanced by lower interest rates, leading to a more modest rise in repayment costs. Additionally, first-time buyers’ incomes trailed behind the growth in average earnings during the housing market downswing in the mid-1990s, but by 2000 had risen above the trend, comparable to that experienced almost two decades earlier.
At 56%, homeownership in London is the lowest in the UK. The capital also exhibits the highest level of households in the private rented sector, whilst London and the North East have the highest proportion of households living in social rented housing. Therefore housing tenure in London is quite distinct from the rest of the UK (see figure 3).home

Figure 3: Housing tenure by region (source: ONS, 2009)
On a UK level homeownership has continued to fall confirming a downward trend since 2007 (see figure 1) and since the credit crunch the shift towards renting has accelerated (English Housing Survey, 2011). This trend is also confirmed in London; although since 2009 there have been signs of revival in the market (RICS, 2012).prices

 

 

In the peak year of 2007 average house prices rose to £303,739 compared to the average UK property price of £184,130 (see figure 4). However, coinciding with the global economic crisis in 2008/2009 house prices in London underwent a dramatic fall of more than 20%, the biggest regional fall in house prices. Furthermore, number of residential property transactions in the capital decreased from 192,000 in 2007 to 95,000 in 2009 (see table 1). During the latter timeframe, along with the South East, London experienced one of the biggest percentage declines. In general, the regions that experienced the highest price increases during the boom had the biggest price falls from the third quarter of 2007 to the first quarter of 2009, and London was amongst the number. east

 

Table 1: Regional property transactions (source: ONS, 2010)
Despite the intense downturn in the market a revival in the London sales market is observable in 2009. In the eleven months to the end of 2010, prices in central London rose by 19%. In greater London as a whole, prices rose by an impressive 14% over a comparable period (see figure 5).bounceFigure 5: London price bounce (source: Knight Frank, Nationwide, 2011)
The remarkable recovery of central London house prices is manifest in data illustrating that in 2010 five boroughs had exceeded the 2007 property market peak. city

Figure 6: House prices in London boroughs compared to 2007 levels (source: Land Registry, 2012)
The foremost recovery is evident in in the City of Westminster where in 2010 average property prices were almost 10% higher than in 2007. In Kensington and Chelsea prices had risen by nearly 6.5% and in other boroughs such as Camden, Hackney and Hammersmith and Fulham house prices had all exceeded the levels attained at the peak of the boom (Land Registry, 2012). At 2.9% below the peak of the 2007, in 2010 and 2011 London was the only region to that experienced house price increases (RICS, 2012).
However, it is important to note that most London boroughs are below house prices achieved in 2007. The majority have seen declines of 0.1% to 4.9%. While a slightly smaller of number boroughs have experienced falls of 5% to 12.5% (Land Registry, 2012).
4.1.3. Mortgage lending
For the duration of the financial crisis the majority of lenders lowered LTV ratios in compliance with the Council of Mortgage Lenders (CML). Thus, by the third quarter of 2010 the average LTV ratio was 77%, with the consequence that the average first-time buyer was obligated to pay 94% of his/her income as deposit for a house purchase. latter

The latter was in a striking contrast to the boom era, when UK banks generally extended 90% LTV ratio loans to first-time buyers. In 2007 the average buyer was paying only 37% on income as a deposit.
Stricter lending regimes and reduced demand for prime lending is indicated by the outstanding lending’s derisory growth of 0.5% in 2011 (see figure). In contrast, between 2001 and 2007 outstanding secured lending volumes had risen by 10% annually, from 55% of the GDP in 2000 to 85% of GDP in 2007 (Global Property Guide, 2011).
Nonetheless, there are indications of recovery in the market indicated by a rise in mortgage lending. For example, although down by 14% from £12.2 billion in December 2011, mortgage lending in January 2012 was £10.5 billion, a 10% increase from £9.5 billion in the same period of the previous year.

4.1.3.1. Low House-building activity
Low mortgage availability not only impacts private buyers but the figures also indicate that since the credit crunch and the accompanying contraction in the mortgage market total house production has slumped dramatically. For example, according to Communities and Local Government (CLG) private housing starts in London fell from a peak of 20,000 in 2005/06 to a provisional 12,000 in 2008/09. Given the shake-up in the house-building industry and its supply chain it is unlikely that for the time being output levels will return to conditions before the economic crisis.
4.2. Discussion
To assess the impact of economic crisis on the London residential market the following research objectives were developed which linked in the progression of a conceptual framework:
1. To assess the extent of the economic crisis on the London residential market
2. To demonstrate if London’s position as a global financial city dictates its vulnerability to economic crisis in the residential property market, as well as an enhancement for recovery.

4.2.1. Analysis of results
4.2.1.1. The extent of the economic crisis on the London residential market
It was established in the literature review that the UK housing market is one of the most volatile in the world (Stephens et al, 2008). Cycles in the housing market are a recognised feature of the political economy and have direct bearing on the effective functionality and sustainability of the sector. Yet there is another feature of the UK housing market that does not receive sufficient attention. That is, the market is regionally differentiated; suggesting regional and local differences in the way housing sector behaves. Thus, an evaluation of the economic crisis on the London housing market must be judged against its unique background, which in accordance with CRBE (2008) include average wage being 44% higher than the national average; a rapidly increasing population; a younger than average demographic. In particular there is a much higher proportion of 25-34 year olds and fewer children and people over the age of 50. The latter is attributable to the attraction of younger workers and students to urban locations, while prosperous families tended to migrate to suburban areas; economic growth that outperforms the rest of the country; a housing market possessing a lower share of homeowners when compared to the rest of the UK and a higher share of private rental sector reflecting the more transient nature of London’s population; and finally the capital attracts a substantial amount of foreign investment in the residential sector.

The study revealed that patterns governing residential property in London appear to exhibit a uniqueness setting it apart from the set of the country (GLA Economics, 2008, Mountainfield, 2012). During the boom era, although all areas enjoyed the benefits of a rising market, there is a transparent functional hierarchy throughout England in the sense that London assumed a hegemonic position in the experience of house price growth (Ferrari and Rea, 2011). Nonetheless, the evidence illustrates that following a sustained period of rapid growth activity in the London residential market the city experienced an abrupt slowdown at the initial onset of the credit crunch. This in turn filtered through to house prices which recorded significant plunges in 2008.
Five years after the inception of the recession the research illustrates that although prime location areas such as Pimlico, Chelsea, Knightsbridge, Kensington, Holland Park and Notting Hill have seen the strongest recovery, this is principally due to cash rich buyers possessing the capability to make purchases without a mortgage and foreign investors taking advantage of the week pound (Mountainfield, 2012). Moreover, many outer areas of London have fared less well and are still some way from returning to 2007 levels (Land Registry, 2012). Thus, the number of residential transactions at the commencement of 2012 was still running at a third of the levels achieved during the pre-credit crunch years. Overall almost one in three boroughs are currently seeing half or less of the number of homes being sold each month, compared with pre-2007 boom years (Savills, 2012).
In explanation of the above this work is aligned with the argument put forward by Cook (2012) describing the residential sector as a “gridlock” market, which is far from recovery, despite the data from the Land registry showing houses in the capital rose by 1.4% in 2011. The sluggishness in the market is attributable the contraction in the mortgage market (Miles, 2011) and low consumer confidence as a consequence of the weak economic environment and housing market outlook. Therefore, the latter confirms studies by Berry (2004) and Heim (2010) demonstrating consumer confidence to be a significant factor in the housing market. Thus, if consumer confidence is high, expectations with regards to the housing market is also high and vice-versa. Furthermore, the ease of mortgage availability has been effectively removed from the market; therefore, on the issue of mortgage availability the study recognizes the imperative role of housing finance for the effective recovery of the market and will address the matter in the next section.
However, in alignment with the demand and supply conceptual framework designated to govern the study it can be accepted that as growing demand and inelasticity of supply drove up houses prices during the boom years, lack of supply continues to underpin the rise in house-price recovery (RICS, 2012). According to the RICS (2012) despite the problems encountered by first-time buyers to secure mortgage finance, the level of inquiries from potential purchasers is increasing. This imbalance between demand and supply suggest that house prices will continue on an upward trend.
In the meantime there is adequate evidence to interpret the economic crisis as having greatly impacted the London residential market in the sense that, five years on, in spite of observable upward trends, the mainstream market remains in a declined state. Nonetheless, in the determining the strength of the causal relationship between the economic crisis and the housing market a further number of interrelated variables must be taken into account such as real income and interest rates, since it is not always clear which one is leading the other (Benito et al, 2006).
In line with the research findings of Mishkin (2007) and Assenmacher-Wache (2010) and Stan (1995) the study confirms a strong relationship between the collapse of subprime mortgage market and a decrease in property transactions, suggesting that the availability of housing finance is a key driver of housing demand. Therefore, CB Richard Ellis (2008) maintains that although the economy is stronger that at the last recession in the 1990s, the residential market slowdown has been exacerbated by inter-bank lending difficulties emanating from the contamination caused by the collapse of the subprime market, which has effectively culminated into a mortgage contraction problem (Favilukis et al, 2008).
Many elements of the housing market boom such as the relaxation of credit limits, the subsidization of risky (subprime) borrowers, the clustering of defaults among riskier borrowers and consequently the climatic dynamic mortgage contraction problem stand in explanation for the reason why the London housing market is unable to return to transaction levels experienced before the credit crunch. Given that housing finance is a vital component of a well-functioning housing system (Warnock and Warnock, 2007) to facilitate sale it follows that if mortgage lending is in a state of contraction then house price sales will stagnate or remain in decline.
The availability of mortgages with high LTV ratios has fallen sharply implying the difficulty in obtaining loans that are close to 100% of the house value. However, this should not be taken as indication of a damaged market or a market that is not functioning correctly. Indeed, when everything is taken into consideration, in truth, perhaps 100% mortgages never made viable commercial sense, thus with this understanding it is appropriate to think of the mortgage market as undergoing a correction process (Stiglitz and Weiss, 1981).

4.2.1.2. Does London’s position as a global financial city dictate its vulnerability to economic crisis in the residential market as well as act as an enhancement for recovery?
London is by many measures the world’s biggest financial centre, yet an examination of the underlying causes of the credit crunch reveals that the London economy is increasingly reliant on financial innovations from which it can neither escape or control, despite ever increasing efforts of the state to intervene and regulate (Wolf, 2008). In servicing the global circuits of financial capital, the London economy is highly susceptible to external events. Thus, the origins of the credit crunch in the global financial world have significantly impacted the financial engine of the residential market and in turn consumer behaviour.
Nonetheless, the research also reveals that by virtue of its financial position and ability to attract investors, London’s housing market has the strongest prospect in the country, as witnessed by the faster pace of its recovery in comparison to the rest of the country (Economist, 2012). The research illustrates a growing disparity between London, where house prices continue to rise and other regions, where houses prices are falling or in a state of stagnation (Global Property Guide, 2012). The latter has led some authors to call the phenomenon the “London effect” (Financial Times, 2012), but in truth as demonstrated by Hometrack (2012) this effect is uneven across the city, with the bulk of house price increases occurring in Central London super-prime areas.

4.3. Summary
This chapter categorised the themes emerging from the findings as well as the permeated themes found dominant during the study. The succeeding chapter will therefore concentrate on providing necessary recommendations to assist in improving the functionality of the London housing market.
5.0. Recommendations
Having drawn a relationship between the findings and extant literature and conceptual framework of demand and supply this chapter suggests and critically examine recommendations necessary for preventing the adverse effect of boom and bust in the London housing market.

5.1. Policy measures
The housing market has experienced persistent booms and bust cycles for the past 40 years. Such cycles distort house choices and increase risk. They drive mortgage arrears, repossession rates, curtail house-building capacity and increase intergenerational inequalities (Stephens et al, 2008, Crowe et al, 2011). Moreover, London exemplifies the enormous disparities in house price inflation between regions, which engenders a mobility trap, rendering it difficult for some people to move from one region to another and deterring others from doing so altogether (Stephen, 2011). Yet despite the hitherto mentioned distortions policy-makers have done little to resolve the problem.
According to Bernanke (2002) the foremost policy tenet used in the management of an economic boom is “benign neglect”, that is, to wait for the bust and then proceed ahead with the clean-up, rather than attempt to prevent the boom. Two assumptions underlie this approach: First, the conviction that it is problematic to effectually identify unsustainable booms, or bubble in real time; and second, the notion that the distortions associated with preventing the boom prevail over the costs of implementing corrective mechanisms (Igan, 2009). However, while early interventions may engender its own distortions, it may prove appropriate to undertake policy action on the basis of a judgement call if a real risk that inaction could result in disaster. Thus, the recommendations of this work are constructed on the adoption of this perspective and hold general applicability to boom and bust cycles, but nonetheless occupies relevance to the London situation.
From the outset it is important to knowledge that there are no flawless solutions. However, according to Igan (2009) a governmental policy perspective can assist in limiting the risks connected with housing booms, but will inexorably necessitate costs and distortions, while effectiveness may simultaneously be reduced by loopholes and implementation problems.

5.1.2. Economic crisis
The foremost impact of the economic crisis on the residential market is the contraction in lending. Such crises are not conductive to enhanced lending as the risk of default are greatly enhanced (Adair, 2009). Consequentially, the inclination to lending, even among banks that are in a position to lend is considerably reduced. The government does not have the power to force banks to lend, but responsibility rests on its shoulders to create economic conditions that are conductive to lending. Perhaps, the most viable option is the ‘bad bank model’ entailing government purchase of toxic assets from banks and the establishment of a so-called bad bank into which all toxic assets would be deposited (Neyer and Vieten (2010). The latter would enable banks to remove toxic assets from their balance sheets and reduce the need to hoard capital in anticipation of further write downs. Although, the mechanisms of such a system would be accompanied with a variety of complexities in terms of implementation, embarking in this direction would help to restore confidence in the system.
5.2. Housing supply
Over the past decades there has been a growing understanding concerning the dynamics of demand and supply as a contributory element to volatility in the residential property market (Barker, 2004, Bloch, 1997). In the long run housing supply in relation to underlying demand determines the price of housing, but in the short run rapid price rises may occur due to demand shocks arising from such factors as rapid falls in interest rates or changes in credit availability (Burnside et al, 2011). Thus, unsustainable price booms are likely develop if there is an underlying shortage of housing because this places real prices on an upward trajectory and create expectations of future price rises (Meen et al, 2005). To put it another way, the equilibrium between housing supply and demand is the fundamental long-term determinant of house prices (Stephens, 2011). London is archetypical of where a cumulative backlog of housing has been created from persistent inadequate levels of new supply (Pretty and Hackett, 2009).
To alleviate the above it is essential that the planning system mechanisms serve to facilitate appropriate new developments. Importantly, Pretty (2008) identified that the current system is over-burden, under-resourced and in need of essential reform to improve the lengthy pre-application process, excessive information requirement and the current unsatisfactory target regime. Furthermore, according to Stephens (2011) it is crucial that incentives are provided to encourage local authorities to permit developments. Fundamental to the framework is the idea of land auctions and taxation of vacant land to encourage reluctant landowners to release land for development projects, providing that prices remain low. However, none of the approaches are without complexities, suggesting that there is a requirement for less complex short-term solutions.

5.2.1. Tackling housing market volatility in the short-term
Increasing housing supply could reduce the risks of market volatility, but it would not eliminate the risk of price volatility. For example, the housing market would nonetheless endure susceptibility to demand shocks occurring from factors relating to changes in credit conditions (Stephens, 2011). Therefore, other policies are necessary to introduce greater stability.
Arguments have been put forward suggesting that incorporating housing costs within the official measure of inflation would have reduced the scale of the recent boom (Morton, 2010). The latter would facilitate the Monetary Policy Committee the opportunity to respond to rising house prices by increasing the Bank rate in relation to rising house prices. Nonetheless, this is debatable because the UK’s inflation targeting is forward-looking. Furthermore, the impact of such an approach would be dependent on the measure of housing costs that was adopted within the consumer index (Stephens, 2011). Thus, other remedies are required.
Other suggestions include the utilisation of counter-cyclical capital adequacy requirements for mortgage lenders to replace the generally pro-cyclical effects of the regime that operated during the boom (Repullo and Suarez, 2012). These are intended to be used to create more stable conditions that are likely to lessen house prove volatility. However, countering the latter some observers identify that it is impractical to expect capital adequacy requirements to address volatility successfully when this was not what they were designed for. Other alternatives such as taxation have also been suggested as a mechanism for reducing housing market volatility. However, it is probable that tax reforms would be controversial and the evidence gleaned from other countries is not conclusive.

5.2.2. Housing supply and affordable housing
In truth ‘piggy-backing is an insufficient reaction to the urgent social and economic problems of affordable homes in the capital. That the provision of half of all affordable homes is contingent on a single mechanism, which is turn is reliant on a buoyant housing market necessitates pressing reform. To overcome the constraints of the latter practices the government needs to allocate the GLA the necessary authority and resources to deliver significant new affordable homes without relying on developers (Shostak and Houghton, 2009). For example, sites currently owned by local authorities, the NHS and English Partnerships should be identified and the RSL rather than private developers would be invited to submit proposals for these sites. A principle element is that such developments should be driven by the need to build more homes, for rent and for sale, not to maximise capital gains (Morton, 2012, Shostak and Houghton, 2009).

5.3. The mortgage market
According to Igan (2011) the economic crisis has accumulated support for intervention into the way in which the housing market operates to ensure a stable economic environment for reducing underlying risks. If the main diagnosis of the crisis emanates from increased leverage in the real (particularly households) and financial sectors then policies should be directed at preventing housing booms and the associated leverage build-up. As such regulation of mortgage lending should assume a priority position in the aim to control risk in the residential market. The latter is in line with the recommendations of the IMF (2011) insisting on a more flexible and generally tighter monetary policy in future which would concentrate not only on changes in consumer goods, but also changes in asset prices. Thus, contending that potential excess liquidity causing asset bubbles in the future could be avoided.
Considering the above this study assumes alignment with the work of Stephens (2011) suggesting a replacement of the current system with a three-tier approach founded on the principle of shared responsibility to decrease the variables that effectively contribute to downturns and protect borrowers from the consequences of economic crises. The first tier relies on prudential lending, which denotes locating the correct balance between providing access to mortgages and minimising the risk of default, which should be dependent on an assessment of free disposable income in order to identify the size of the mortgage that a household can afford. However, with regards to the latter a more reliable evidence base is required for determination of the trade-offs between risk and access to credit.
The second tier encompasses responsible lending. This requires active procedures to improve potential borrower’s financial capability in addition to existing measures to ensure that the borrower has adequate information to make informed choices. Stephens (2008) alludes to the development of online of budget planning tools to enable borrowers to assess mortgage affordability.
To prepare for the unforeseen the third tier comprises of a safety net, involving a partnership insurance model based on contributions from borrowers, lenders and the government. The scheme would provide time-limited, non-means-tested protection for mortgage capital and interest payments in the event of a loss of income through loss of job, sickness or accident. It would also incorporate the principle that lenders are required to exercise forbearance, which has made an important contribution to limiting repossessions in the current downturn (Styles, 2011).

5.4. Developing alternatives to ownership
The study demonstrated that homeownership remains the preferred form of tenure for the majority population. However, it is this desire for ownership that increases volatility through amplified demands, which drives up house prices and creates unsustainable booms. As an alternative, in the London market private renting has expanded, but on the part of many private renters, this is attributable to the inability to access the property ladder (Heywood, 2011). Furthermore, as long as private renting is unable to provide greater security it remains an unsuitable long-term form of tenure for more vulnerable households.
Stephens (2008) advocates that low cost homeownership (LCHO) may provide the most generally desirable alternative. The latter is particularly applicable to the London situation concerning the inadequacies of affordable housing. This could be adapted to become a risk-reducing product for householders that could, in fact afford full ownership. However, there are trade-offs between utilising available subsidy to enable households to make the transition to low-cost homeowners when they could not otherwise access ownership. As such social rented housing is likely to provide the most suitable alternative for households that seek long-term security but are unable full or shared ownership. The latter illuminates the imperativeness of retaining security of tenure in the social rented sector.

6.0. Conclusion

The dissertation set out to examine the impact of the economic crisis on the London housing market and to supply answers to a number of interrelated questions which bears great significance to the overall analysis. In section one the objectives were established as follows: to assess the extent of the downturn on the London residential property market and to demonstrate if London’s position as a global financial city dictates its vulnerability to economic crises, as well as serve as an enhancement for recovery.
The review of the extant literature in section two was valuable in demonstrating that over the last few decades house prices are subject to sustained long-run growth followed by recurrent fluctuations rarely identifiable with other consumer durable goods. Thus, the risk consideration is currently widely documented and occupies a prime theoretical discourse, while modelling of house price behaviour has attracted much research attention. Considering that housing generally assumes a pattern whereby demand may vary rapidly while supply makes slow adjustments (Guissani and Hadjimatheou, 1991), most of the conducted research tend to model price behaviour based on the interaction between demand and supply side factors. (Meen, 1990; Malpezzi,1999). Patterning the latter, it was considered appropriate to adopt a demand and supply conceptual framework to guide the study the assessing the impact of the economic crisis on the London market.
Conducting the study on a regional level as opposed to national level enabled the research to illustrate the phenomenon of price variations with and between regions. That is, even for similar dwellings house price change spasmodically rather than regularly and price movements are never uniform within and between regions. Thus, investors in London and the South East accumulated more equity in their property than elsewhere in the country. In this sense, during the boom years house prices appear to be set largely through expectations of current and future prices rather than through market demand and supply fundamentals (Clayton, 1996). As long as credit conditions were good, players worked with hindsight to set current prices and predict future prices (Case and Schiller, 1988, 2003).
During the course of the literature investigation it was also highlighted that the purchase of a house is generally the largest single item purchased by a household. Essentially, its market value is several times the household’s annual income. (Alhashimi Dywer, 2004). For the average homeowner, the house is the major asset in his/her portfolio. As such it is intricately linked with the cost and availability of availability of credit, and thereby to government monetary policy (Guissani and Hadjimatheou, 1991).
It is also important to note that the general higher trend towards homeownership was paralleled by financial deregulation, the internationalisation of capital markets and the integration of mortgage finance into global capital markets (Adair et al, 2009). Consequentially, it has been argued that such developments have compromised the former stability of national housing systems (Fallis, 1995). Moreover, lending practices in deregulated environments have frequently involved higher LTV ratios and thus, simultaneously higher risk exposure to households and institutions.
Thus, analysing the global economic crisis in relation to the London residential property market necessitates understanding synergies and the interconnectivity that exists between housing and financial institutions as well as between financial markets and the economy (Crowe et al, 2010). This facilitates a comprehension of the correlation between the housing economy, the effective closure of interbank lending and the subsequent pronounced restriction on the supply of available mortgage funds (Adair, 2009).
Therefore, it is imperative to recognize that what requires resolve is the complete dysfunction of the global financial system which has extended to the real economy and in turn exacerbated the downturn in the property market. The consequence of the economic crisis is loss of two paramount ingredients: confidence and trust. Necessarily, until confidence is restored to the banking system the financial system will not adequately serve the need of the investment market.
In relation to the above the study confirms that the economic crisis has had a significant impact on the capital’s housing market to the extent that having lead the trajectory of house price increases, the London housing market experienced dramatic falls in house prices between 2008 and 2009, while the region was the worst hit area for falls in the number of property transactions (RICS, 2008).
The above is evidence of the distortion in the London housing market, and thus, the imperfectness and inefficiency of the of the entire system (Arnott, 1987; Gau, 1987) The long boom in house price growth over the past decade has taken homeownership out of the research of an increasing number of people. Before the credit crunch, one alternative for many households was to take loans out on terms which they could only afford if interest rates remained low (Shostak and Houghton, 2010) However, as an important demand side factor in driving house price trends the contraction of the mortgage market is having a substantial impact on house buyers. Mortgage finance is currently both more expensive and harder to obtain and is typically beset with tighter conditions, such as higher deposit requirements and substantial arrangement fees. The latter has affected first-time buyers hardest but has also impacted the entire housing market preventing many chains from being completed, and thus, denting confidence on all levels.
The negative impact of increasing regulatory scrutiny and stricter criteria for mortgage approvals is not only confined to private homeownership, but the downturn in the number of houses being build is a direct consequence of reduced credit availability. The fundamental obstacle being that larger development schemes are no longer viable for developers.
The above in turn denotes the toughness of achieving residential developments targets for affordable housing in London discernible from government reliance on the private market for such homes (Shostak and Houghton, 2010). The effect of economic crisis connotes that this source of affordable housing is starting to dry up because the ramifications of such deals are essentially commercially unviable. Thus, the latter exacerbates the overall RSLs programmes squeezed by both tighter public spending controls, as well as the reduction in credit availability.
However, almost five years after the onset of the economic crisis it is true to say that London is leading the recovery in the housing market. This has encouraged many to argue that UK housing is essentially two markets: London and elsewhere (Mountfield, 2011). Prices are supported by the fact that supply of new properties on the market in London is lower than demand. Additionally, demographics exert an important role, as well as the operation of more cash-rich and foreign buyers driving up prices. Houses prices currently experience monthly increases and in some cases London appears to be the generator extracting the national market out of the doldrums. Indeed, at the commencement of 2012 house prices in the capital were approximately double the national average; however, closer examination highlights the important revelation of the luxury end of the market propelling and driving price increases. Cash-rich buyers and overseas investors continue to pour their cash into prime London properties viewing it as a safe haven investment in the wake of increasing economic uncertainty. Apart from the principal criteria that the UK is relatively politically and economically stable, the fundamental issue is that demand for central London residential properties far surpasses supply. Thus, even though London strives to provide an increased amount of housing in the capital, this will not affect prices in areas such as Belgravia, Knightsbridge and Kensington and Chelsea due to the limited scope to build new homes in these locations. Therefore, identifiable from the investigation, there are two distinct categories of properties in London: prime and sub-prime. The prime are those valued at £1 million or more which are currently driving the market (Mountfield, 2011).
Hence it is therefore apparent that the London residential market is experiencing an uneven recovery. There are considerable intra-city variations in the market. Outer areas have fared less well and are still some way from returning to 2007 levels. Nonetheless, the evidence shows that 15 of these boroughs are within 5% or less of attaining the heights of 2007. The remainders boroughs are remain greater impacted by the economic crisis.
The evidence in this paper goes a long way in demonstrating the market downturn and macroeconomic uncertainty as reflecting the interdependence between housing markets and wider economic trends. In response London needs to think through its relationship between its economy and local housing system to ensure that the delivery of new supply reinforces competitiveness. Therefore, the onus is on the city to make an improved use of strategic planning tools to shape the local market and deliver a housing growth plan that will be more correctly aligned with supply and demand.
The outcome of tension in the credit market is continued increases in the demand for renting. London will have to allocate greater attention to expanding and improving the private sector, which provides an essential bridge for those unable to access social housing and those unable to enter homeownership. Increasing the supply of flexible housing is a necessary condition for sustained economic growth – supporting labour mobility, bringing greater market stability and helping to meet the affordable housing needs of different groups.
There is no easily solution for addressing volatility and vulnerability in the housing market, but four areas of policy appears to assume priority: implementation of corrective mechanisms to rectify the dysfunction in the global financial system; housing supply, managing the housing market cycle, better protection against volatility and developing alternatives to ownership.
During the course of the research there were a number of issues that came to the surface, such as the widening of regional divergence, whereby, for example, Britain is becoming increasingly two-tiered with the Midlands and the North of England in deep trouble, while London and to some degree the South East appears to be more resilient. A further issue is the role of government in providing affordable housing in the capital. Considering the scope of the research as well as the limited time it was not possible to place greater emphasis on investigating these matters. Therefore, the natural extension of this study would be a comparative analysis with other regions in the UK to obtain a greater understanding of the dynamics of the housing market. These refinements would admittedly allow for a more definitive focused analysis.

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