8.0 The Way Forward
Analysing the global financial crisis in terms of the impact on the residential and commercial property markets in the UK and Ireland has required understanding of the synergies and connectivity that exist between real estate and financial institutions and between the financial markets and the economy. In undertaking that analysis it has become clear that an adverse feedback loop has developed between the financial markets and the real economy and that the ongoing uncertainly has spread to effect the wider investment markets, including real estate. It is important, therefore, to understand that the current downturn in the property market is not simply a cyclical correction of the asset class – that had commenced prior to the financial crisis. Instead what requires resolve is the complete dysfunction of the global financial system that has consequently spread to the real economy, and which in turn has exacerbated the downturn in property markets globally.
The collapse of the sub-prime mortgage market in the US triggered the crisis of confidence in the global financial system by exposing a widespread mis-pricing of risk within capital markets. As a result financial markets abruptly lost two ingredients central to their vibrancy; confidence and trust. Until confidence is restored to the banking system financial markets will not start functioning again. Government interventions in the banking system were necessary to stabilise the system and preserve the interests of systemically important financial institutions. The initial series of interventions by governments and central banks were vindicated in that they recapitalised the banks and prevented complete melt down of the global financial system. However, subsequent interventions intended to stimulate lending are destined to fail for two principal reasons. Firstly, concerns continue to persist about the
60