Finance Dissertations – I graduated from university just over a decade ago and I distinctly remember how fellow students and I found it difficult choosing a finance dissertation topic in our final year. We had the added pressure of on going assignments coupled with starting a finance dissertation. Reflecting back on my personal experiences, it takes time, dedication and after many attempts you should be able to start your finance dissertation once you have identified a suitable topic and title.
This article will help you formulate a strategy for your finance dissertation, some of these ideas will be glaringly obvious to you, I let you decide; selecting the dissertation topic is the preliminary and most important element. Decide on a topic that you are keen on and have good knowledge of, don’t base your dissertation on a topic which you know little about as this may lead to a weak and less substantial research dissertation. It will advantageous to look at assessments you have already completed on your finance degree as you will be able to exploit and enhance this research, you should be able to base your finance dissertation on the existing research you have undertaken. I completed three finance assignments based on international finance constraints of developing countries, I found that I got a good understanding of this field of study and I based my finance dissertation on this topic. This helped me out immensely as I could base my dissertation on subject matter I am familiar with and I had existing resource at hand such as journals, key literature and articles. I suggest that you assess what you have already covered during your degree as this may lead you to formulate a robust finance dissertation topic.
Once you have decided on a dissertation title or topic you need to ensure you have the correct resources at hand, this would include relevant articles, prominent literature in the field of finance and access to up to date journals. You will find that your university’s library will host many academic databases and you must exploit these as they will host a plethora of finance subject material, this will prove vital in the dissertation literature review section of you research project. I suggest referencing journal articles no older than 5 years unless you are referencing a key piece of research by a prominent scholar. Don’t quote outdated reference material as it will detract from your overall grade, keep it cutting edge and up to date.
Finance Dissertation Topic Ideas
Try to focus your dissertation topic on finding the solution for upcoming problems in the finance industry or within a dynamic organisation. Examine how international finance has become such a critical factor in global economies. Try to identify how global finance has changed over the past decade notably within developing countries. Assess how retail banking is changing and how internet banking has boomed in recent years. Analyse stock market behaviour across different boundaries and look at the financial competitiveness of nations. Discuss investment opportunities for global companies and nations; the list of topics goes on. You can always attribute advantages and disadvantages to these areas. Below is a list of sample finance dissertations I used when creating my own dissertation, they may prove useful to you.
I recommend that you use statistical analysis in your dissertation analysis section, this will help underpin your findings and prove that you can use appropriate finance models in a research project. You have the opportunity to critique finance models at some point in your research, only do this if you have a valid reason to do so. Using at least two finance models such as dividend discount model (DCF), value at risk (VaR), expected return, regression analysis, forecasting and standard deviation should be included in your finance dissertation.
Don’t forget to reference all material used in your dissertation in the reference and bibliography section, this is so important. You do not want to write an outstanding research project and run the risk of dissertation plagiarism. Always abide by your university’s plagiarism guidelines, it is very easy to fall into this trap especially when using material found on the internet.
I’m sure this article will help you write your own finance dissertation topics and that the links will provide guidance. Feel free to add any comments or additional advice that would add to this post.
Challenges of Brexit: Luxury Concierge Business in the UK
Challenges of Brexit: Luxury Concierge Business in the UK
Challenges of Brexit – The UK public voted to leave the European Union on June 23, 2016. The leave is termed as Brexit and carries along with numerous speculations of potential effects to businesses within the UK and the world over. Lawyers and legal experts have had mixed reactions where a section argues of the potential risks to businesses while the remaining section argues of the potential benefits (Cooper, 2016, p. 414; Redelinghuys, 2016, p. 24). However, the Brexit calls for a negotiation between UK and Europe. The vote does not have legal effects on the laws of the UK and EU. As a result, the UK will remain part of the EU until an agreement to exit is signed or in a period of two years after the UK government issues a formal notice of exit (McLaren, 2016, p. 29).
The Brexit denies the UK some of its rights to participate in EU processes and thus has potential implications on the businesses in the UK. This report will analyze the possible implications of the Brexit on the luxury concierge businesses in the UK. Luxury concierge business is a customer service-based business that attends to visitors through the arrangement of luxury services such as hotel bookings, hotel servings, and air tickets (Som & Blanckaert, 2015, p. 90). The business encompasses many institutions such as hospitals, office buildings, airports, malls, colleges, corporations and apartment buildings. The luxury concierge business in the UK has in the previous past recorded an extraordinary growth. The business is however affected by the Brexit since it deals with several customers from several countries outside the UK (Sinn, 2016, p. 42). Besides, the article will review the possible strategic plans that the luxury concierge businesses can take to address the potential effects of the Brexit.
The UK legal framework for its EU membership and the processes through which it fulfills its EU obligations is found in the European Community’s Act 1972. The EU law includes the principle of direct effect meaning individuals and business can invoke an EU provision for a particular country or with another individual (Fichtner et al., 2016, p. 359; Sked, 2015, p. 41). The EU treaties of the direct effects explain further that the obligations are unconditional, precise and do not require additional measures at either the national or European level. The EU precedence principle is also advantageous to business enterprises. The principle states that the EU laws are superior to the national laws of the member states and that the member states may not exercise a national law that contradicts the EU law (Laughlin, 2016, p. 49). The exit from the EU implies that the EU courts have no control over the UK issues. The luxury concierge business, therefore, does not enjoy the benefits of the above two principles with significant effects on the business.
Challenges of Brexit and Effect on Trade
The effects of the Brexit have caused market volatilities and ongoing uncertainty about the future of the businesses in the UK. The luxury concierge business thus requires putting in place contingency plans and developing strategies to address the uncertainties (Mcloughlin & Aaker, 2010, p. 79). The business corporations should identify the aspects of their businesses likely to be affected by the Brexit. The corporate should consider forming teams that report to the senior management to assess the potential impacts of the Brexit on the businesses (Bianchi, Cosenz and Marinković, 2015, p.84). The companies cannot yet conduct a detailed long-term planning at the period of the post-Brexit regime. However, the companies are better placed when the management knows where the issue lies as that will give an idea of the planning process (Shackle, 2016, p. 13).
The luxury concierge business enterprises also need to assess their position on the Brexit whether the enterprises will comment actively or contribute their views relevant to the luxury concierge industry (Fichtner et al., 2016, p. 301). The enterprises may also consider their participation in the initiatives that shape the post-Brexit regime (Simms, 2016, p. 26).
At the moment, there are three exit models following the referendum vote to exit the EU. The Norway model will see the UK join the European Free Trade Association and European Economic Area (EEA). The condition will allow the UK to access a single market and the EU trade without restrictions and tariffs (Harris, 2016, p. 43; McDonnell, 2016, p. 20). However, the UK will be barred from accessing the critical EU trade agreements. The Swiss model provides that the UK can join the European Free Trade Association only and enter bilateral agreements with the EU in specific sectors (Shankar & Carpenter, 2012, p. 47).
The process is, however, lengthy and complex in addition to costly. Finally, the totally out model suggests that the UK assumes the same position as any other member of the World Trade Organization (WTO) (Smith, 2016, p. 20). The position implies that the UK can negotiate a free trade agreement with the EU after seven years of negotiation between the EU and Canada.
With the perceived challenges of Brexit and the above three models, the luxury concierge businesses can consider reviewing the industry terms dealing with licensing, cross-border operations, a forum for disputes, tax, and terms dealing with material adverse effect (Rieth, Michelsen & Piffer, 2016, p. 577). The enterprises should moreover consider Brexit as a risk factor in contracts. Therefore, the enterprises must enter into the contracts very carefully to avoid the unintended consequences given the uncertainties of the post-Brexit conditions.
It is imperative for the luxury concierge businesses to have conversations with the customers, suppliers, and clients, especially those in the EU to make clear the contractual relationships in this post-Brexit period. The businesses should examine their supply chain for any vulnerability such as an increase in import costs that will likely be transferred to firms.
Challenges of Brexit has made the UK no longer bound by the EU’s VAT directives thus giving the UK government more flexibility to set the rate of sales tax and the items subject to each rate. The administrative burden for the luxury concierge business will rise as a result of reduced access to the EU’s coordinated vat tax collection system (Chipman, 2016, p. 36; Doherty, 2016, p. 12). The enterprises should, therefore, engage with the government and with the EU to help shape their priorities in the European and domestic context. The businesses should pay greater attention to the decisions around infrastructure, taxation, digital policy and immigration since the areas significantly affect the enterprises. Finally, the businesses need to put arrangements to prevent the uncertainties of complying with different laws in the UK and the post-Brexit EU (Millett, 2011, p. 88).
The challenges of Brexit and associated risks can strike anytime. The effects will affect the exports because of the wide array of commercial links that the luxury concierge business has with the EU across the B2B and B2C space. The UK government will have to negotiate trade agreements with more than 50 countries that it enjoyed preferential treatment with while in the EU. The government may not have the capacity to open many new large-scale negotiations with other countries equal to that of the EU thus necessitating the businesses to have a defined strategy to address the challenges as they will occur.
Bianchi, C., Cosenz, F. and Marinković, M., 2015. Designing dynamic performance management systems to foster SME competitiveness according to a sustainable development perspective: empirical evidences from a case-study. International Journal of Business Performance Management 31, 16(1), pp.84-108.
Chipman, J 2016, ‘Why Your Company Needs a Foreign Policy’, Harvard Business Review, 94, 9, pp. 36-43, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Cooper, B 2016, ‘See EU later: Brexit and us’, Governance Directions, 68, 7, pp. 414-417, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Fichtner, F, Steffen, C, Hachula, M, & Schlaak, T 2016, ‘Brexit decision is likely to reduce growth in the short term’, DIW Economic Bulletin, 26/27, pp. 301-307, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Fichtner, F, Steffen, C, Hachula, M, Junker, S, Kirby, S, Michelsen, C, Rieth, M, Schlaak, T, & Warren, J 2016, ‘Brexit decision puts strain on German economy’, DIW Economic Bulletin, 6, 31, pp. 359-362, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Harris, P 2016, ‘Bracing for Brexit’, The National Interest, 143, p. 43, Academic OneFile, EBSCOhost, viewed 18 October 2016.
Laughlin, LS 2016, ‘WHERE TO INVEST AFTER A BRITISH BREAKUP’, Fortune, 174, 2, pp. 49-52, Business Source Complete, EBSCOhost, viewed 18 October 2016.
McDonnell, J 2016, ‘Do we want to drift towards a Tory Brexit, or make the case to end austerity across Europe?’, New Statesman, 5317, p. 20, Literature Resource Center, EBSCOhost, viewed 18 October 2016.
McLaren, L 2016, ‘Cleaning up the mess: the job of rescuing Britain from post-Brexit chaos will fall on women politicians–including the new PM’, Maclean’s, 29-30, Academic OneFile, EBSCOhost, viewed 18 October 2016.
Mcloughlin, D., & Aaker, D. A. (2010). Strategic market management: global perspectives. Hoboken, N.J., Wiley.
Millett, S. M. (2011). Managing the future: a guide to forecasting and strategic planning in the 21st century. Axminster, Triarchy.
Redelinghuys, P 2016, ‘BREXIT: Blessing or balls-up? (Cover story)’, Finweek, pp. 24-27, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Rieth, M, Michelsen, C, & Piffer, M 2016, ‘Uncertainty shock from the Brexit vote decreases investment and GDP in the Euro Area and Germany’, DIW Economic Bulletin, 6, 32/33, pp. 575-582, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Shackle, S 2016, ‘A city left behind: post-Brexit tensions simmer’, New Statesman, 5327, p. 13, Literature Resource Center, EBSCOhost, viewed 18 October 2016.
Shankar, V., & Carpenter, G. S. (2012). Handbook of marketing strategy. Cheltenham, UK, Edward Elgar Pub.
Simms, B 2016, ‘A new balance of power: is full political union of the eurozone the only way to stop the disintegration of Europe after Brexit?’, New Statesman, 5322, p. 26, Literature Resource Center, EBSCOhost, viewed 18 October 2016.
Sinn, H 2016, ‘A Brexit Lesson: Is a Single Currency Not Worth the Gamble?’, International Economy, 30, 3, pp. 42-70, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Sked, A 2015, ‘The case for Brexit’, Challenges of Brexit and The National Interest, 140, p. 41, Academic OneFile, EBSCOhost, viewed 18 October 2016.
Smith, G 2016, ‘THE BREXIT CRISIS THAT WASN’T’, Fortune, 174, 5, p. 20, Business Source Complete, EBSCOhost, viewed 18 October 2016.
Som, A, & Blanckaert, C 2015, The Road to Luxury: The Evolution, Markets and Strategies of Luxury Brand Management, Singapore: Wiley, eBook Collection (EBSCOhost), EBSCOhost, viewed 18 October 2016.
Doherty, C. 2016, “Forever friends?”, Financial Director, pp. 12-13.
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This post intends to provide you with a list of quality MBA thesis topics and how to structure your own MBA thesis. Move universities differ when it comes to writing a thesis, this includes referencing style and word count. The MBA thesis structure below will provide useful when structuring your MBA thesis, I have used the below structure on a couple of occasions and benefited from it.
MBA Thesis Structure – Essential Components
Writing a dissertation introduction is perceived as a relatively straightforward aspect of the dissertation writing process. The reason for this may be that we often find typical components in an introduction that we can use, regardless of the study we are writing. One of the challenges of writing a good introduction, however, is to be brief, and to stay focused – This will help you with to write the best MBA thesis topics.
An incoherent or unfocused introduction, or one that is over-lengthy, may detract from the overall grade of the dissertation and will not create a good impression on the reader(s). Be mindful that you should avoid being anecdotal in your introduction (i.e. writing as if you are telling a story) and you will also need to avoid wasting words by stating the obvious and writing a series of over-generalized statements.
a clear statement of your MBA thesis aims and objectives;
the problems to be solved to reach your objectives, and initial ideas on how to solve them;
you may also indicate a gap in knowledge, if applicable
research questions – if a research project
Unearthing new theories don’t materialise easily out of nowhere; they build upon the findings of previous academic research and explorations. A literature review illustrates how the academic investigation you are conducting fits with what has been written before and puts it into perspective. A literature review demonstrates to your reader that you are able to:
• Understand and critically analyse the background research • Select and source the information that is necessary to develop a context for your research • Shows how your investigation relates to previous research • Reveals the contribution that your investigation makes to this field • Provides evidence that may help explain your findings later
If you are doing a dissertation, or significant assignment it is likely that you will need to include a literature review. If you are doing a lab write-up or a shorter report, some background reading may be required to give context to your work, but this is usually included as an analysis in the introduction and discussion sections.
What is a literature review?A literature review is an analysis of existing research which is relevant to your research topic, demonstrating how it relates to your investigation. It explains and justifies how your investigation may help answer some of the questions or gaps in this area of research.
A literature review is not a straightforward summary of everything you have read on the topic and it is not a chronological description of what was discovered in your field. A longer literature review may have headings to help group the relevant research into themes or topics. This gives a focus to your analysis, as you can group similar studies together and compare and contrast their approaches, any weaknesses or strengths in their methods, and their findings.
One common way to approach a literature review is to start out broad and then become more specific. Think of it as an inverted triangle. (1) First briefly explain the broad issues related to your investigation; you don’t need to write much about this, just demonstrate that you are aware of the breadth of your subject (2) Then narrow your focus to deal with the studies that overlap with your research. (3) Finally, hone in on any research which is directly related to your specific investigation.
Proportionally you spend most time discussing those studies which have most direct relevance to your research. How do I get started? Start by identifying what you will need to know to inform your research:
What research has already been done on this topic?What are the sub-areas of the topic you need to explore?
What other research (perhaps not directly on the topic) might be relevant to your investigation?
How do these sub-topics and other research overlap with your investigation?
A discussion of the technical literature you have read, explaining why it is relevant for your project critical analysis, e.g. strength, applicability and weakness
Identify any knowledge/research gap and how you may address this gap, if applicable
Note down all your initial thoughts on the topic. You can use a list to help you identify the areas you want to investigate further. It is important to do this before you start reading so that you don’t waste time on unfocused and irrelevant reading.
Searching for sources It’s easy to think that the best way to search for texts is to use the Internet – to ‘Google it’. There are useful online tools that you may use, like Google Scholar. However, for most literature reviews you will need to focus on academically authoritative texts like academic books, journals, research reports, government publications. Searching Google will give you thousands of hits, few of them authoritative, and you will waste time sorting through them. A better idea is to use databases. These are available through the Library in paper and electronic (usually online) forms.
Requirements – MBA Thesis Topics
User requirements for the target system, if applicable; or
Requirements to achieve the success of your project
Evaluation of your proposed system (if building a software system); or
evaluation of your research project, including e.g.
quality of data used: e.g. reliability, coverage/completeness
quality of data collection method, e.g. limitations of sampling methods
quality of analytical methods used, e.g., any limitations? Any bias?
quality of conclusions drawn, e.g. are they affected by potential bias of input data due to methods used, incompleteness of data, etc.
quality of presentations, e.g. which visualisations used to view complex data – what diagrams have been used, are they suitable?
quality of tools used, e.g. are they appropriate? Have you encountered any problems, if so, how did you overcame them?
initial design of software or design of experiments, if applicable; or
methodology for carrying out your research project, inc. where/how you plan to source your data, how you plan to group them, what methods you plan to deploy for analysis,
you can draw a methodology diagram for this.
Questionnaire, if any.
Timetable and work plan for the whole year, agreed with your supervisor, and specifying activities, deliverable and deadlines. See an example timetable here: project management information:
Make sure that you have clearly labelled your time allocation on evaluation and how you will meet the deadlines, etc.
Risk analysis and remedies/management
Appendix (as needed)
An appendix (plural is “appendices”) is a section added to the end of your dissertation. It includes material that expands and explains the subject matter you have discussed in earlier sections. Each appendix should cover a distinct aspect of your subject. Follow the steps below and you will learn how to write an appendix and its importance to your writing. This is essential for MBA thesis topics.
Blank consensus form (if interview/survey are to be conducted)
Blank questionnaire (if interview/survey are to be conducted)
Data tables or diagrams (if appropriate)
Copy of questionnaire or survey
Copies of personal correspondence
Transcripts of interviews
Illustrations or photographs
Explanation of technical information or formulas
And that’s it, everything you need to include. As with everything, it’s a good idea to check with your dissertation supervisor before handing in as they’re the authority on how your University wants your dissertation. Remember, it’s the starting that’s the hard part, once you’ve sat down and committed the time, it should come quite easily.
MBA Thesis Topics Notes
Always check the marking sheet/rubric and make sure that you have meet all of the required work. Also make sure that you observe the percentage allocation for each of the categories and that you have provided sufficient to meet the percentage.
The above is the minimum set of requirements. If you have done more than what is suggested here, for instance a preliminary implementation or tests of existing software tools, by all means report it.
Make sure you do not exceed the maximum pages allowed. If you have useful graphs and data, you can include them in appendix.
Make sure you run spell checker to make sure there is no spelling errors.
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A dissertation proposal is a document that presents a plan for a dissertation to reviewers for evaluation. It is actually a road map showing clearly the location from where a journey begins; the method of getting there and the destination to be reached at. The purpose of the dissertation proposal is to:
Present the problem to be researched and its importance.
Give an idea to instructor about how you will proceed in your dissertation.
Suggest the data necessary for solving the problem and how the data will be gathered, analysed, and interpreted.
A proposal is also known as a work plan, prospectus, outline, statement of intent, or draft plan. It tells us:
What will be done?
Why it will be done?
How it will be done?
Where it will be done?
For whom it will be done?
What is the benefit of doing it?
Dissertation Proposal Format
It should include:
Name & ID of the student
Name of the university
Date of Submission
Table of Contents: List the important headings and sub headings in the dissertation proposal with page numbers.
Chapter 1: Introduction
Introduction/Background: Introduce the specific problem you wish to investigate. Describe briefly the background i.e., the impact and implication of the topic/issue on the environment (the specific set up in which you are studying the issue). It should be well elaborated. It is advised to include current facts and figures in background. You should also explain it in context with the work already done on the topic. It should provide all the necessary initial information so that the reader can better understand the situation under study.
Objectives: State the objectives/goals of the research, keeping in mind the following points:
These should state the purpose of the dissertation
These must be based on logical facts and figures
These must be achievable within specified timeframe and parameters
These objectives should be presented such that these should facilitate the reader to locate various important points in the research work
The specified objectives should be clearly phrased in operational terms specifying exactly what you are going to do, where and for what purpose?
At the end of the study, objectives must be assessed to see if they have been met/achieved or not
Significance: It lays down the importance or potential benefits of your dissertation. It specifies how your study will improve, modify or broaden presented facts in the field under exploration. Make a note that such improvements/ modifications may have significant implications also. When you are taking into account the importance of your study, pose yourself the following questions:
What will be the outcomes of this research study?
Will the results of this research contribute to the solution or development of anything related to it?
What will be improved or changed as a result of the proposed research?
How will results of the study be implemented and what innovations will come out?
Problem Statement/Research Question: It describes the main issue or area to be investigated. The problem is usually represented by the research questions. Research questions are very crucial because research is about finding out what may not be known. Poorly formulated problem/question will lead to pitiable research that’s why researcher must know the question he/she would like to find answer for. The following aspects are important while formulating a problem statement/research question:
A problem statement/research question should be researchable, clear, logical, specific, precise and brief yet comprehensive statement, fully describing the issue under study.
The research problem should be grammatically correct and completely convey the main idea to be investigated.
Chapter 2: Literature Review
A literature review is citation/quotation of a comprehensive review of the published work from secondary sources (journals, research papers, etc) of data in the areas of specific interest to the researcher according to the problem/issue of research. The purpose of literature review is to ensure that:
Important variables that are likely to influence the problem situation are not left out of the study
A clear idea emerges as to which variables would be the most important to consider.
The problem statement can be made with precision and accuracy.
Note: It is important to cite at least 30 findings of researchers in the literature review.
Conceptual/Theoretical Framework can be best narrated with the help of sophisticated diagrams mentioning the independent and dependent variables and their causal affects and final outcomes. The main headings in the theoretical framework are:
Inventory of variables
Direction of relationship
Explanation of established relationship among variables
Inventory of propositions in a sequential order
Hypotheses (Formal statement that presents the expected relationship between an independent and dependent variable)
Hypotheses are the tentative statements that should either be acknowledged or rejected by means of research. Hypotheses give structure and direction to the research. Therefore, care should be taken not to oversimplify and generalize the formulation of hypothesis. It is not necessary that the research should consist of only one hypothesis. The type of problem area
investigated and the extent which encircles the research field are the factors which determine the number of hypotheses to be included in the study. It is formulated when the researcher is totally aware of the theoretical and empirical background to the problem. There are two types of hypotheses “Null” and “Alternate”. Generally, the null hypothesis is used if theory/literature does not propose a hypothesized connection between the variables under study; the alternative is generally reserved for situations in which theory/research recommends a connection or directional interplay.
Chapter 4: Research Methodology
The methodology section should portray how each specific objective will be achieved, with enough details to permit an autonomous evaluation of the proposal. The technical procedures for carrying out the dissertation must be explained in a manner appropriate for the reader. This section should include:
Research Design: Is the study exploratory, descriptive, or explanatory? Why does this particular design suit to the study?
Data Collection Sources: Describe all the sources that will be used for data collection.
Data Collection Methods:
How will the primary data be collected i.e. survey(s), experiment(s), observation(s) etc.? Is it possible to use multiple methods? If yes provide justification.
What is the target population?
What sampling frame will be used?
What type of sampling technique will be used?
Data Collection Tools/Instruments:
Which tools will be used for data collection (i.e., Questionnaire, Structured Interviews, Observations, etc) according to the need of the dissertation?
Why a particular tool is selected?
Is it possible to use multiple tools? If yes provide justification.
How will the data be collected?
How will the quality control be assured during data collection?
How will the answers about practical issues be answered? For example, if you are going to carry out survey, then think about where and for how long this survey will be carried out? Will organizations (specify names) provide you access (physical, time, documents, etc) to what you need for your research?
Data Processing & Analysis: (Methods you will use to extract and process the information you will gather)
How will the analysis be carried out?
Scoring scheme/scale and the statistical methods that will be applied for the analysis of data should be described.
Which software package (MS Excel, SPSS, etc.) will be used for data entry and analysis?
A bibliography is a list of source materials on a particular subject. In a formal report, it includes books and other library materials which have been consulted in preparation of the project. As part of the reference matter, it follows the appendices.
Real estate meltdown, otherwise referred to as the ‘housing bubble’ refers to a period where housing prices decline across the United States further leading to the financial crisis of 2007-2008. These lead to fears that the country was headed back to a depression similar to the Great Depression of 1945. There has been a lot of explanations as to what lead to the housing meltdown, but the real question is, could it be possible that the crisis could have been avoided? My aim purpose in this paper is to bring into discussion why the disaster should have been averted and if we are at risk of facing it again.
To arrive at my goals, first, we would have to look at what were the causes of the housing meltdown in the period 2006- 2008. With the crush of the housing market, economist and financial pundits came up with many explanations as to what lead to the bubble some of which the extent of their impact yet to be determined. It is therefore important to realize that a single factor did not cause the decline in the housing market but a number of them together.
Decline In Mortgage Interest Rates
In economics, we learn that when the rate of savings is low, interests tend to go high. However, that was not the case during the housing bubble. Mortgage rates were little despite saving rates being low mainly because of saving getting into the US economy from outside countries like China and Japan. According to Bernanke (2009), the net savings from outside the country increased from an estimate of 1.5% of GDP IN 1995 to 6% as of 2006.
With the aim of making better returns from investment at lower risk, investors moved from US government securities to mortgage-backed securities that Freddie Mac and Fannie Mae issued. They receive sponsorship from the government, and investors expected that in case of unforeseen circumstances the government would bail the two out. Hence they were low risk.
In addition to a real estate meltdown, mortgage-backed securities received better ratings issued by one of the best rating agencies like Standard & Poor. With the housing prices rising, low mortgage interest rates had a hand in the housing bubble by enabling more house buyers to afford to pay their monthly dues. According to Robert Schultz, increase in the speculation house prices is what made the prices to go up steadily. Speculators did purchase housing at a lower cost to sell when prices go up. With regards to the 2001 period of recession, the Federal government lowered interest rates to keep the economy going. Hence the second cause of housing meltdown.
Reduction In Short-Term Rates of Interest
From 2002 to 2004 the government lowered interest rates with the aim of making a recovery from the earlier recession of 2001. It affected the housing bubble because with the constant rise in the housing prices while household income is remaining steady, homeowners were not able to afford a payment of their mortgage loans at current rates and therefore resorted to adjustable mortgage rates which were preferable at the moment. However, when the rates began to rise, this proved to be unmanageable for homeowners.
The other way was because of leveraging, that is where loans borrowers used their borrowed money to invest. It, therefore, encouraged mortgage lending and thus increasing house prices. When the housing bubble hit, the high level of leverage that was present in the economy worsened the decline in the cost of housing.
Lack Of Strict Rules on Issuing of Mortgage Loans
During the period after the recession, the government of President Bill Clinton did not impose strict rules to financial institutions on the issuance of mortgage loans with the aim of increasing the number of homeownerships. With a reduction in the mortgage fees increased competition among mortgage loan issuing firms and therefore they had to relax their standards to obtain their market share. By the fact that there were securities issued on mortgage loans prompted this.
An increase in subprime mortgages which refers to mortgages issued to persons that were likely to default demonstrates this. Although these kinds of mortgages charged higher rates due to the risk, the all practice was not worth it.
The fact that everyone believed that prices of housing would go up did contribute to the bubble. According to Robert Shiller (2005) in his book ‘irrational exuberance’ which refers to high levels of speculative fever had indeed added to the housing bubble. From house buyers, mortgage lenders, rating agencies to even the government, none of them ever imagined that the prices of housing would ever go down.
Why The Housing Bubble Could Have Been Avoided – Real Estate Meltdown
From my analysis on the factors that lead to the housing, all the above factors did contribute to the bubble, but the main factor being the pointless speculation that the housing prices would continue going being on the rise and there was no reason to suggest otherwise. That is why, according to Robert Shiller (2005) irrational exuberance in any price bubble is difficult to notice, very hard to prevent and neither is it of value to avoid.
However, this could have been avoided if only the players who took part in the excessive speculation of prices of housing could have thought otherwise. The belief by credit rating agencies and foreign investors that prices of house in the US would go up was the primary factor that encouraged mortgage interest rates to remain so low. This notion also leads to a rise in the level of leverage experienced in the economy. The reason being low-interest rates encouraged borrowing for investment on housing with prospects of making good returns upon prices increasing.
I also think that the government regulatory agency should have regulated the constant rise in prices of housing. It could have lowered the speculation and hence chances of leverages being experienced in the economy being minimal. A control of Investment banks and mortgage issuing agencies was necessary. There is supposed to be a set of rules to be followed. Without rules there are chances of thing running out of control.
I also believe that then the government did not receive a better monetary policy to adopt. With the constant rise in prices of housing, it was not in the best interest of the federal government to lower bank rates to increase the number of house owners. The pricing of housing is similar to any other item, the law of supply and demand applies.
The Possibility of Another Bubble Leading to Real Estate Meltdown
There has been a lot of speculation in the media that we are about to experience another housing bubble just a decade after the last occurrence that leads to a financial crisis in the economy. Currently, the average cost of purchasing a house is quite high compared to ordinary income. It is one of the aspects that we need to watch out. Mortgage lenders on the other side are much strict, and real estate investors have hard time to make sells with housing staying as long as three months without being sold. There is a belief that prices of housing are going to return to normalcy the moment investors having high desires of making good returns leave the market. It is only a speculation, but with the current state of house prices I cannot rule out the possibility of another bubble.
Real estate is indeed a venture that is quite rewarding, but this may change as we have seen from our discussion on the events of house prices bubbles. However, I believe that prevention was needed long before it occurred by required government policies through regulating the prices of housing. Indeed it is necessary not to leave any stone un-turned since we cannot rule out the chances of another bubble. We can learn from its experience and be ready to prevent its re-occurrence.
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Schwartz, Herman M. Subprime nation: American power, global capital, and the housing bubble. Cornell University Press, 2009.
CQ Press Research, ‘Mortgage Crisis and Real Estate Meltdown ’ (Nov 2007); 926-927
Gramlich, Edward M., and Robert D. Reischauer, Subprime Mortgages: America’s Latest Boom and Bust, Urban In-stitute Press, 2007.
Cheng, I. A., Sahil Raina, and Wei Xiong. “Wall Street and the Housing Bubble: Bad Incentives, Bad Models, or Bad Luck?” University of Michigan mimeo, April (2012).