Business economics Assignment Example | Topics and Well Written Essays - 3000 words

Business economics - Assignment Example This essay is organized as follows. Section 2 discusses the theoretical views in this regard. Section 3 discusses the property market development mainly housing market development and macro economy in UK in the early 1990s. Section 4 discusses the property market development especially housing market development and the macro economy in UK since 2007 and section 5 concludes the report. 2. Theoretical Views An ideal property cycle according to Ball et al (1998) can be characterized as business upturn and development, business downturn and overbuilding, adjustment, slump and the next cycle. Many economic theories have been put forward to explain these five patterns like the business cycle approach (Barras, 1994; Key et al, 1994), based on accelerator principle. The two major factors affecting property development cycles are exogenous occupier demand for space and pro cyclical exogenous availability of finance according to this approach. However, this approach does not account for the c onstruction completion lags .Further there can be causalities from development cycles to economic activity also. Hence the building lag model developed by Baras(1983,1994) tries to produce an endogenous mechanism to explain development cycles. Here, the lag between demand and supply together with the accelerator principle explains the development cycles. The dynamic model based on historic data for UK property development by Barras and Ferguson (1987a, 1987 b) establishes an endogenous development cycle mechanism. This model identifies the level of user activity and the level of investment activity as the two major economic factors affecting property cycles. This model, however, explicitly includes an endogenous cycle mechanism, which is problematic .Further, the exogeneity assumption for variables like rent, capitalization rates, building costs etc are also questionable. Several explanations based on irrational behaviour of valuers, developers and lenders like slowness of these age nts to respond to clear market signals and failure to learn from experience are also given to property cycles (Baum and Crosby, 1995). However, these models implicitly assume irrational behaviour, which is its limitation. The model of property cycles and option pricing based on owners and developers (Grenadier, 1995) shows that the stickiness of vacancy rates increases with the rise in uncertainty and adjustment costs. Further, the probability of overbuilding rises with the rise in construction period, adjustment costs and uncertainty about future demand. However, this model is based on the assumptions regarding preferences in finance theory, which is unlikely to hold good in property markets. This reduces the predictability of the model (Ball etal.1998).Thus all the models discussed above have some shortcomings. Their predictability cannot be generalized and depends upon the context only. In addition to the above theoretical models, the property markets especially the housing marke ts are obtained to have reverse effects on the macro economy through their impact on the consumption expenditure of households, through the effects on