The role of UK government increasing the competition in the mortgage Dissertation

The role of UK government increasing the competition in the mortgage markets to stimulate the British housing marketing and even - Dissertation Example The UK too experienced housing bubble burst as a reported 37,749 homeowners in the UK lost their homes to the bank between March and June 2008 (Seeking Alpha, 2008). The crisis deepened as banks cut off mortgage lending. Banks and building societies are expected to pay about ?130bn of the emergency borrowing they availed from the Bank of England and the Treasury (Bown, 2011). Rationale for research Traditionally, in most economies, people preferred to remain tenants throughout their life. Changes in lifestyles, education and temptations by the cheap lending rates introduced the concept of becoming house owners. Businessmen in earlier days would tend to invest any extra funds into their business rather than invest in housing (Lawson, 2011). The idea was that this would grow and bring in more prosperity and ready cash to be used for personal purposes than invest in dwelling which one never disposes off. Liquidity preference theory states that the more liquid an asset, the more attracti ve it is an asset as it can be traded easily (Wyatt, 2011). Properties, even in a buoyant market take several weeks to be traded and in a recessionary economy, it may take years. It is less attractive an as investment and the transaction costs are also higher because of the stamp duty and legal fees. Motivation for the study The motivation for the study has arisen from this concept – why did people become interested to invest their savings in dwellings which may appreciate over time but can be of no use to the person who has made the investment? It would also be interesting to evaluate the role that the UK government has played in boosting housing and mortgage of housing in expectation that this would contribute to the growth of the UK economy. Research Aims and Objectives With the objective to determine that competition in the UK mortgage sector did not yield the expected returns and was in fact responsible for the housing bubble, the objectives of the study are: To evaluate the measures that the government took in boosting the housing sector To list the incentives that the government provided to enhance competition in the mortgage market To evaluate the impact of the cheap lending rates in the housing market on the UK economy Literature Review While traditionally building societies were responsible for financing house owners, the concept changed in the 1980s. The business model of the building societies was very simple but as demand intensified, there were queues for mortgages which prompted government intervention (CML, 2004). Competition in the mortgage sector intensified as centralized lenders such as housing corporations entered the market. The UK property bubble was inevitable as the valuations were stretched and lending criteria loosened (Lynn, 2007). Unsecured bad debts and mortgage arrears continued to rise as owners could not keep up payments. The government made attempts in different ways to boost investments in housing. Government intervent ion in housing finance has always existed in every economy through the creation of special circuits for funding flows (Diamond & Lea, 2000). The idea was that investments in dwellings would enhance the banking and the financial sector which would support the growth of the economy. However, political and market forces have been responsible for eroding the reasons for creating the circuits.