Implications of High Mortgage rate on Economic Growth of the United Kingdom Harvard Case Solution & Analysis


Introduction – Chapter-One

The real estate market is one of the difficultmarkets, which has different drive forces behind the developments in the industry. However, that developmentis considered the domestic consumption, which leads to the economic growth in the country.Similarly, the mortgage market is the one of thecomplicated markets in the world having worst consequences regarding devaluation, and depressed real estate market. However, this depressed market has many causes that createduncertainties among the investors in the market.

These uncertainties are ofkey importancein evaluating the behavior of the real estate market in according with the economic factors contributing to the economic growth in the country. Furthermore, it is determined that economic growth of the country can be measuredby its gross domestic product (GDP). This measurement takes in account the goods and services produced within the country in given period of one year.

Moreover, GDP is akey performance indicator for the country as whole(Pettinger, 2014), because it gives anidea how thecountry has made progressas compared to the previous year. On the other hand, the real estate market’s progress is being measuredby the interest rate offered by the government. (Pauley & Mueller, 1995)The reason for this is that the interest rate is the key to approach the determination of the real estate market growth based on the assumption that declining interest rate would boost the housing market, whereas, increasing interest rate in the country would slow down the real estate developments in the country. However, thisis an assumption based on the investors’ perspective.

In customers’ perspective, it depends on the behavioral finance and behavioral economics that shapes customers’decision-making ability.(Mullainathan & H.Thaler, 2000) However, the mortgage rate is also critical in shaping the decision of the client. Meanwhile, the mortgage rate differs from the offering rate of anational bank, whereas the difference is called spread where thebanks assume their profit over the life of themortgage. Apart from that, the determination of the spread differs from the one to another basedon factor e.g. the borrower’s creditworthiness. (Demyanyk & Van Hemert, 2001)

That factor has led to theglobal financial crisis in 2008-09, which were due to banks’overexposure towards the real estate market, and securitization of the mortgage to the pool of investors in UnitedStates. (Vig, et al., 2010)However, banks providing the mortgage loans to the borrower without determining their incomes, which made them default to pay, and the whole chain of securitization led to thecrisis, and affectedthewhole world in financial distress.Furthermore, the borrowers’ level of income needs to be assessed to ensure they have sufficient income to meet the mortgage debt obligations.

Throughthe market perspective,theinterest rate is the benchmark to predict about the real estate market. However, if we analyze the demand and supply theory over the real estate market, then we can conclude that if the demand in the market increases for the mortgage, then if the supply remains constant, then there would be higher mortgage rates in the country. In contrast, if the mortgage supply increases andif demand remains constant, then banks would offer lower mortgage rates in the country.....................

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