Credit Crunch and Its impact on UK's Real Estate Market Dissertation

Credit Crunch and Its impact on UK's Real Estate Market - Dissertation Example Bernanke and Lown (1991) define a credit crunch as a decline in the supply of credit that is abnormally large for a given stage of the business cycle. Credit normally contracts during a recession, but an unusually large contraction could be seen as a credit crunch. The credit crunch is the result of multiple factors. These multiple factors adversely affect the ability of the banks to supply credit at a time when banks’ ability to adjust to these factors was unusually limited. A credit crunch that continues for a long time is actually opposite of easily available and plentiful lending practices .These cheap lending practices are sometimes called â€Å"Easy Money† or â€Å"Loose Credit† .As it been stated earlier that credit crunch is a cyclic process . During the upward phase in the credit cycle it is seen that the prices of the assets undergo lot of fervent competitions .Upward credit cycle is also marked by the presence of leveraged bidding with inflation in a p articular asset market. These all situation can then lead to formation of a speculative price bubble. During the upswing of the cycle increase in the money supply happens because of new large debt creation. This in turn stimulates the economic activities. Finally there is also chances of temporarily raise in economic growth and development.(Cooper,2008) The reason of credit crunch can be diverse. Few of the reasons are given below: 1. If there is an anticipation about the decline in the value of the collateral. The collateral is used by the banks to secure the loans that are taken. If the decline in value continues then it will lead to credit crunch.(Bizer ,1993) 2. If there is perception in the market about the risk of insolvency of other banks in the banking system. In this situation the traditional financial institutes will tighten the credit lending regulations (Kleege and Stephen,1992) 3. When the central government is imposing direct credit controls or are implementing monetar y changes then lending of the loans will be done very warily by the goverment. (Grant,1993) 4. When there is a prolonged carelessness in lending the loans. The process of lending the loans is inappropriate and doesn’t take into account the intricacies of market and interest rate. This leads to losses to the lending institutions. The debtor is not able to pay the debt and finally the financial institutions will reduce the availability of credit. The prolonged defaults by the debtors leads to credit crunch.(Peek ,Joe and Eric,1993). 5.When the assets which were overpriced, before ,suddenly sees a sharp fall in their prices then it leads to financial crisis because of price collapse. If this price collapse continues then many banks and investors will face insolvency and bankruptcy. The financial institutions will become more alert .As the result the financial institution restore to restrict the regulations for lending the loan and as a result the market will face the credit crun ch.( Rosenblum.1991) The last two points were the main reason for the recent credit crunch that struck the world’s economy. This was caused due to the bursting of housing bubble in