What is the credit crunch and how does it come about? At what point does the credit crunch cause negative effects within the economy? What is the relationship between the performance activities in the housing sector and the credit crunch? What effects does the credit crunch cause on the housing sector? How can the credit crunch be effectively managed to reduce its negative effects on the housing sector? What are the effects of the U. K housing market on the other housing markets in the world? 3. 0 Literature review Introduction
The housing sector in the United Kingdom is one of the developed sectors, which make a high percentage of contribution to its Gross Domestic Product. Between the periods of 2000 and 2008, the housing sector in the United Kingdom experienced high growth rates which were cut short with the beginning of the global economic crisis (Bank of England survey). Most of the housing facilities in the United Kingdom are located within the urban centres, and most of those facilities are owned by housing organisations whereas some few are owned by the government and individuals.
Over the last few years, the housing sector in the United Kingdom has experienced the effects of the increased money supply as well as the shifts in the interest rates, which has lead to high inflation rates that has made the government to intervene with its fiscal policies that seek to redeem the economy (Hunter et al 2005, p361). The credit crunch in the United Kingdom is said to have began when the financial institutions were experiencing a plentiful of cash flows in their business transactions.
Considering that most of these institutions did not have many uses for their money, they began offering credit facilities to their customers even the high risk customers, who have high chances of being unable to repay back the credit facilities (IMF and IMF 2008, P47). Some of the credit facilities that were being offered by the financial institutions include the mortgages. The requirements for making the credit facilities were relaxed, to an extent that the number of borrowers for mortgages increased, leading to the increment in the investments in the housing sector (Nadeem 2007).
The housing sector then began experiencing problems when most of the mortgage borrowers found difficulty in repaying their mortgages, and because the number of borrowers who defaulted was high, the effects of the credit crunch began creeping in the UK economy especially on the financial sector and the housing sector (Foleyin 2007). Following the start of the credit crunch most of the top mortgage institutions in the United Kingdom went under and thus forced to seek financial help from the government and other international organisations like the international monetary fund.
Most of the homeowners also are continuing to lose their homes because they arte unable to repay their mortgages (Clark Howes accountants 2008). As the effects of the credit crunch are advancing in various economies in the world, the financial institutions in the United Kingdom became reluctant in lending to the mortgage lenders (Manchester 1987, p102-142). The government has since then intervened to rescue the mortgage banks that are facing financial crisis in their operations. On the other hand the cost of living has also been triggered rising up to a high level which furthers the housing sector crisis (Molloy and Graham 2009).