Finance & Blockchain Sample College Essay

Blockchain is widely regarded as a game changer and an innovative solution that will have a significant influence on countless facets of our life. According to Cecchetti and Schoenholtz (2018), blockchain will facilitate the execution of hidden functions, referring to the activities that corporations consider to be their “outback” operations. Blockchain is a technology which primarily focuses on record-keeping. Contrary to the past ages when record setup were poorly designed and quite crude, record-keeping, particularly in the financial sector, has since gone digital thanks to blockchain. The element of record-keeping symbolizes a watershed moment in the financial world, as enterprises increasingly depend on digital systems for efficiency, security, and dependability. Blockchain and financing have already been deeply ingrained in the majority of financial-oriented operations. Asset and equity share ownership are a few specific examples that are thought to perform effectively with blockchain (Cecchetti & Schoenholtz, 2018). A blockchain platform can reliably monitor the ownership of each financial asset, which has a substantial impact on combating financial crimes and terrorism funding. Similarly, the coupling of finance and blockchain appears to be a revolutionary connection competent in removing financial distortions resulting in increased capital reserves. Security has demonstrated to be beneficial in financial transactions. Hash functions and equivalent encryption algorithms used in blockchain are excellent for rendering financial systems increasingly safe and dependable.

With blockchain, the financial market’s future seems promising. Finance is going to figure prominently in blockchain use, with the financial industry beginning to utilize blockchain for banking activities (KPMG, 2017). C ryptocurrencies, much like paper money, will be generated and governed under established monetary and fiscal policy. Homegrown virtual currencies are going to develop as a tradeable currency in the same manner that we have currency comparable to countries across the world. According to KPMG (2017), the incorporation of blockchain into finance will bear a significant influence on the financial sector as a whole. In the long term, blockchain will be interwoven with banking markets, allowing financial participants to examine financial data and information in real-time. Organizations will maintain public and private ledgers through developing a policy structure focused on blockchain for a healthier economy.

The merging of blockchain and banking will have a significant influence on present financial professions. Some occupations will almost certainly be eliminated by blockchain. The unification will provide smooth financial functions, which will result in job losses owing to a significant decrease in operating expenses (Eaton-Carrdone, 2017). Certain professional jobs will certainly vanish as new ones emerge. As financial industries are expected to execute frequent financial assessments to discover financial security issues, professional positions in cryptography will be tremendously enhanced. Auditors and accountants’ jobs will be drastically altered. These specialists will need to hone their talents even further by learning the intricacies of blockchain technology. In certain cases, accountants will serve as crucial consultants to companies considering implementing blockchain into their financial operations, providing recommendations predicated on balancing the advantages and service costs of the blockchain architecture.

It could be difficult to anticipate where blockchain will be in the coming years. Regardless, firms should start preparing and learning everything possible regarding blockchain, as the financial sector is projected to undergo a massive disruption. According to Eaton-Carrdone (2017), if blockchain is successfully enforced, it is likely to provide greater substantial offers in the financial industry for specialists and clients. Financial analysts and blockchain specialists argue that blockchain will not substitute experts, but rather completely restructure their responsibilities to meet the demands of the technology.

References

Cecchetti, S. G., & Schoenholtz, K. L. (2018). Finance and the Blockchain: A Primer. Money, Banking and Financial Markets. https://www.moneyandbanking.com/commentary/2018/5/13/finance-and-the-blockchain-a-primer

Eaton-Carrdone, M. (2017, January 4). How blockchain will affect financial services employment. EFinancialCareers. https://www.efinancialcareers.com/news/2017/01/how-blockchain-will-affect-financial-services-employment

KPMG. (2017). Blockchain and the future of finance. https://advisory.kpmg.us/articles/2018/blockchain-future-finance.html

Finance For Managers Sample Assignment

Introduction

The overall context would broadly evaluate the financial performance of a construction management company named Buildrite Construction Pvt Ltd. The company has been further formed by two key executives or professional builders who realized the need to have a reliable construction building company that can consider the investment projects with affordable costs and maximum efficiency. For a long period, the company has been rapidly focusing on building the construction framework of bathrooms, kitchens, luxury wardrobes, and fitting the new kitchens for domestic customers. To ensure providing the best quality service in the construction network, the company has paid close attention to the quality of construction work and gradually, it has scaled up the profitability and scalability in the best way possible. However, the company has been impacted amid the rise of the Covid-19 pandemic which made it restructure its financial strategies through which it can revise its business growth and sustainability to perform better over the years.

Analysis of the financial performance

The financial performance of Buildrite Construction Pvt Ltd can be specified by undertaking several financial ratios such as the operating profit/loss, net, and gross profit margin, working capital, current ratio, quick ratio, leverage, debt to equity ratio, inventory turnover, total asset turnover along with the consideration of return on assets and return on equity. From the calculation of operating loss, it can be claimed that the business has incurred losses in both the year 2019 and 2020 but the company was able to revive 800 million in 2020 as compared to 1600. The net profit margin of the company amounted to be above 39% in 2019 and 33% in 2020 which means to make $39 and $33, the company had a gross profit margin of 39% and 33% respectively (Ginting, 2021, p. 460). However, the net profit margin of the company is 0.63 and 3.16 in 2019 and 2020 respectively which implies that the company is more able to cut down the costs and can provide its construction services to people at a price higher than the costs.

On the other hand, the working capital of Buildrite in 2019 and 2020 which amounted to 250 and 280 respectively indicated that the company manages and supports the potential for its strong growth opportunities. The current ratio of Buildrite Construction Pvt Ltd is above 1.5 which means that the current ratio is relatively higher.

It implies that the company is more able to pay its obligations as it has a higher proportion of values based on its assets collection compared to the short-term liabilities (Alimohammadlou and Bonyani, 2018, p.261). The debt to equity ratio is 2019 and 2020 was 0.22 and 0.14 making it very low which implies that the company has rendered lower financing amounts by debt or liabilities via the lenders compared to the relatively high debt levels. Stating about the inventory turnover, the company has recorded 4.24 and 2.69 in 2019 and 2020 which indicates that the company is selling the goods quickly and it has improved sales and demand for its services in the market. The total asset turnover of Buildrite Construction Pvt Ltd is 2.11 and 1.62 in both the year 2019 and 2020 which facilitates that the company can generate more revenues for its growth and development in the future (Nufus et al., 2020, p.436). The return on equity (ROE) for Buildrite Construction Pvt Ltd is less than 1 in both the year 2019 and 2020 which indicates that the company is not using the company’s equity resources efficiently to generate the income. It earns much less compared to the equity shared with the shareholders. Moreover, the company has generated a return on assets (ROA) of less than 1 which symbolizes that the company needs to improve its profitability score to a major extent over the period.

Financial analysis of Buildrite Limited 2020 2019
     
Analysis of financial ratios
 
Calculation of budgeted operating profit/loss
Revenue 1500 1600
Cost of goods sold 2300 3200
Budgeted operating profit/loss -800 -1600
Calculation of gross profit margin (Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100)
Revenue 3800 4800
Cost of goods sold 2300 3200
Gross profit 1500 1600
Gross profit margin 39.47 33.33
Calculation of net profit margin (Net Profit Margin = Net Profit / Revenue * 100)
Net profit 120 30
Revenue 3800 4800
Net Profit Margin 3.16 0.63
Calculation of Working Capital (Current Assets – Current Liabilities)
Current assets 445 525
Current liabilities 165 275
Working Capital 280 250
Calculation of Current Ratio (Current Assets / Current Liabilities)
Current assets 445 525
Current liabilities 165 275
Current Ratio
2.70 1.91
Calculation of Quick Ratio – (Current Assets – Inventory) / Current Liabilities
Current assets 445 525
Current liabilities 165 275
Inventory 120 200
Quick Ratio 1.97 1.18
Calculation of Leverage (Total Assets / Total Equity)
Total assets 1195 1275
Total equity 1195 1275
Leverage 1 1
Calculation of Debt to Equity Ratio (Total Debt / Total Equity)
Total Debt 165 275
Total Equity 1195 1275
Debt to Equity Ratio 0.14 0.22
Calculation of Inventory Turnover – Cost of Sales / (Beginning Inventory + Ending Inventory / 2)
Beginning Inventory 540 370
Ending Inventory 630 770
Cost of goods sold 2300 3200
Inventory Turnover 2.69 4.24
Calculation of Total Asset Turnover – Revenue / (Beginning Total Assets + Ending Total Assets / 2)
Revenue 3800 4800
Beginning total assets 540 370
Ending total assets 630 770
Total Asset Turnover 1.62 2.11
Calculation of Return on equity – Net Profit / (Beginning Equity + Ending Equity) / 2
Beginning Equity 525 675
Ending Equity 840 960
Net profit 120 30
ROE 0.04 0.01
Calculation of Return on assets – Net Profit / (Beginning Total Assets + Ending Total Assets) / 2
Beginning Total Assets 540 370
 Ending Total Assets 630 770
Net Profit 120 30
ROA 0.05 0.01
Payback Period
Initial investment 1,00,000 1,00,000
Cash flow from investing activities per year 35,000 70000
Payback 2.9 1.4

Analysis of non-financial performance

Speaking about the non-financial performance of the company of Buildrite Construction Pvt Ltd, the year 2020 and 2021 has been relatively busy years in demand for domestic extensions as well as for further renovations for kitchens. Throughout the years of 2019 and 2020, the company has contacted more customers and based on the demand for its services, the company has witnessed a high level of demand for its services over the period (Anthony et al., 2019, p.85). Despite the high level of demand for the construction work undertaken by the company, the company has witnessed a higher shortage of labor and materials which further led to the delay in its jobs.

Based on the volume of work, there are hundreds of suppliers who were tied up with the Buildrite Construction Pvt Ltd who had demanded high prices to sell the services. For instance, the price of timber has been shot up based on the procurement work done by 3 to 5 months. Apart from that, the business has also faced significant challenges to sourcing the raw materials, hiring the best-talented manpower, and its heavy reliance on using subcontractors (Xie, Huo and Zou, 2019, p.702). Over the period, the company started to lose control over the quality of work that has been performed. The company suffered consecutively to find new subcontractors which incrementally increased its financial cost.

Performance management

Speaking about the operating losses that have been incurred by the company of Buildrite Construction Pvt Ltd. the business has incurred losses in both the year 2019 and 2020 but the company was able to revive 800 million in 2020 as compared to 1600. As the operating losses are significantly lower, it implies that the company’s core operations are still not profitable enough to generate revenues at a large scale and certain investment strategies need to be considered to bring improvement in the overall financial portfolio of the company (Sardo, Serrasqueiro and Alves, 2018, p.72). The consideration of negative operating losses as stated above in the figure symbolizes that the operating expenses and cost of goods sold are far greater than sales. It has been further calculated by subtracting the itemized deductions from the adjusted gross revenues.

In other words, the company’s financial position is in such a state in which the total expenses exceed the total revenues. Thereby, it can be said that there is a certainty to have future losses for Buildrite Construction Pvt Ltd. as there are no reliable losses in the identification of the net losses. However, the analysis of both financial and non-financial performance has been conducted by considering the key metrics such as the profit margin, average order value, return on assets as well as the consideration of outcome-based measures such as market share, customer satisfaction as well as new product adoption rate (Nizam et al., 2019, p.43). With this regard, the greater emphasis on identification of industry economic characteristics, company’s strategies, assessment of quality based on firm’s financial statements along with the analysis of current profitability risk has also been measured up to a considerable extent.

Management accounting

In today’s world, accountants significantly help the managers to make effective business decisions by measuring and tracking the company’s performance through appropriate financial analysis and interpretation of the company’s key financial statements such as the cash flows, income statement, balance sheet along with other accounting statements. The accountants broadly help the company’s key executives to make the decisions in real-time. In this case, the measurement of performance against the forecasts and budgets helped to avoid the costly overturn to allow the company to remain competitive in a particular manner (Busch and Friede, 2018, p.603). The measurement of performance against the budgets as well as the forecasts generally helps to avoid the costly overruns which can allow the company to remain competitive in the market.

The financial accounting information can help the managers to analyze the cost-benefit technique in the present situation of the company that can make the events visible and perceptible for the daily activities based on the quantitative overview of the company. The accounting information further helps the business manage to decide the amount of investment that needs to be made based on the financial data (Alshehhi, Nobanee, and Khare, 2018, p.494). The accountants broadly help the managers to make strategic business decisions through extensive standard capital budgeting metrics like the net present value and internal rate of return.

Speaking in detail, the financial accounting information helps in framing the strategic decision making as it provides the investors to compare between the financial health of the securities and assessing the creditors to assess the solvency and liquidity of the business. Managerial accounting is further used to develop long-term and short-term decisions that include the financial health of the company. It significantly helped the managers to make operational decisions to increase the efficiency of the company to make long-term decisions.

Financial budgeting

There are several budgeting methods or techniques which the companies use which are incremental, activity-based, proposition, and zero-based budgets. These four budgeting methods have their advantages and disadvantages which can be covered in concise detail. The first approach is the company of Buildrite Construction Pvt Ltd. one of which is a top-down budgeting approach. The top-down approach acts as a time-efficient approach as the decisions are made by a limited number of senior or top-level executives. Considering this top-down approach of budgeting, the junior managers have the skills to fully participate in the budgeting decision-making process (Liu, 2020, p.331). Bottom-level budgeting is a budgeting approach in which the middle and top-level managers are more likely to achieve the plans in the financial budget over the period. The incremental budgeting method starts with the analysis of the previous budgets and ads based on the incremental amount to cover the inflation.

The main advantage of the bottom-level budgeting approach is quick and easy to maintain and it suits the organizations with acceptable historic figures. Another zero-based budgeting approach requires all the costs to get justified by the expected benefits. It acts as a potential alternative to the incremental budgeting technique based on the record of the previous budget in which the inefficient operations can be discontinued. Apart from that, there is an increase in staff involvement as it requires a lot more engagement and adequate information to perform the cost-benefit analysis (Lahouel et al., 2021, p.101656). The company of Buildrite Construction Pvt Ltd. integrally often uses the rolling budget by adding the accounting period when the accounting period expires over the period. This budget broadly helps the companies such as Buildrite Construction Pvt Ltd to plan and control the accurate budget as the budget can further extend into the future.

Investment appraisal

Payback period

Figure 2: Payback period

(Source: MS Excel)

Based on the analysis of the payback period, it can be claimed that the company of Buildrite Construction Pvt Ltd has acquired the project of major construction projects for 1 year in 2019 and 3 years in 2020. By its definition, the payback period is the time that is needed to recover or revive the cost of the investment that has been made by the company. The payback period is a much important step that is usually taken by the investors and other financial stakeholders to calculate the total return on the investment. The payback period for 2019 is for 1 year and this means that it has acquired attractive investments but as in the year 2020, the payback period has been for 3 years and this makes it less desirable to attract the eyes of institutional and retail investors (Hansen and Block, 2020, p.00158). However, the payback period has been calculated by dividing the investment amount by the annual cash flow within the period.

With this regard, discounted payback period accounted for the effect of the time value of money. It significantly uses the discounted cash flows which are more accurate compared to the payback period. For Buildrite Construction Pvt Ltd, The best way which the company has used to choose the long-term investments is to evaluate its past earnings as well as facilitate the future earnings projections. Capital budgeting is highly important for Buildrite Construction Pvt Ltd to consider as it helped the business to create the measurability and accountability to determine the long-term financial prosperity and economic capability of the specific investment projects. The examination of the P/E ratio has been a common tool that is used to evaluate if the stock is undervalued and overvalued. It is calculated by dividing the current stock price by the company’s earnings per share (EPS). When the company considers a lower P/E ratio, it implies that the investors are more willing to pay and invest in specific projects (Alshehhi, Nobanee, and Khare, 2018, p.494). The main sources of finance are equity finance and debt finance. In inequity finance, the investors are the owners of the company based on the investment portfolio. In debt finance, the creditors grant the companies an adequate amount of money known as the debt financing method.

Business finance

Speaking about the different business finance options which are available to global businesses such as Buildrite Construction Pvt Ltd, these are business loans, invoice finance, business overdrafts, credit cards, startup loans, and asset finance. All these business finance options are extremely useful and influential to frame the strategic business decisions for the business. The business loans allow the companies such as Buildrite Construction Pvt Ltd to borrow a lump sum amount of money and pay it back over a certain period with a reasonable amount of interest. It is further categorized in to secured and unsecured business loans which the banks usually provide to different types of business organizations (Xie, Huo and Zou, 2019, p.702). The invoice finance helps the companies to borrow the money against the voice of income due from the customers.

Business overdrafts are another major source of finance used by businesses to make payments that usually exceed the available balance of specific companies such as Buildrite Construction Pvt Ltd. Business credit cards are used for small businesses and in this case, the companies can use the credit card providing the outbound balance by the end of the credit free period. With the consideration of these business finance options, the company has contacted more customers and based on the demand for its services, the company has witnessed a high level of demand for its services over the period (Hansen and Block, 2020, p.00158). Despite the high level of demand for the construction work undertaken by the company, the company has witnessed a higher shortage of labor and materials which further led to the delay in its jobs. Based on the volume of work, there are hundreds of suppliers who were tied up with the Buildrite Construction Pvt Ltd who had demanded high prices to sell the services. For instance, the price of timber has been shot up based on the procurement work done by 3 to 5 months.

Conclusion

It can be concluded that the company has been rapidly focusing on building the construction framework of bathrooms, kitchens, luxury wardrobes, and fitting the new kitchens for domestic customers. To ensure providing the best quality service in the construction network, the company has paid close attention to the quality of construction work and gradually, it has scaled up the profitability and scalability in the best way possible. The business has incurred losses in both the year 2019 and 2020 but the company was able to revive 800 million in 2020 as compared to 1600. As the operating losses are significantly lower, it implies that the company’s core operations are still not profitable enough to generate revenues at a large scale and certain investment strategies need to be considered to bring improvement in the overall financial portfolio of the company. The consideration of negative operating losses as stated above in the figure symbolizes that the operating expenses and cost of goods sold are far greater than sales. It has been further calculated by subtracting the itemized deductions from the adjusted gross revenues. In other words, the company’s financial position is in such a state in which the total expenses exceed the total revenues.

References

Abban, A.R. and Hasan, M.Z., 2021. The causality direction between environmental performance and financial performance in Australian mining companies-A panel data analysis. Resources Policy70, p.101894.

Alimohammadlou, M. and Bonyani, A., 2018. A comparative analysis of dynamic and cross-sectional approaches for financial performance analysis. American Journal of Finance and Accounting5(3), pp.253-275.

Alshehhi, A., Nobanee, H. and Khare, N., 2018. The impact of sustainability practices on corporate financial performance: Literature trends and future research potential. Sustainability10(2), p.494.

Anthony, P., Behnoee, B., Hassanpour, M. and Pamucar, D., 2019. Financial performance evaluation of seven Indian chemical companies. Decision Making: Applications in Management and Engineering2(2), pp.81-99.

Busch, T. and Friede, G., 2018. The robustness of the corporate social and financial performance relation: A second‐order meta‐analysis. Corporate Social Responsibility and Environmental Management25(4), pp.583-608.

Ginting, E.S., 2021. Ratio-Based Financial Performance Analysis of PT. Mustika Ratu, Tbk. Enrichment: Journal of Management11(2), pp.456-462.

Hansen, C. and Block, J., 2020. Exploring the relation between family involvement and firms’ financial performance: A replication and extension meta-analysis. Journal of Business Venturing Insights13, p.e00158.

Lahouel, B.B., Zaied, Y.B., Song, Y. and Yang, G.L., 2021. Corporate social performance and financial performance relationship: A data envelopment analysis approach without explicit input. Finance Research Letters39, p.101656.

Liu, Z., 2020. Unraveling the complex relationship between environmental and financial performance─── A multilevel longitudinal analysis. International Journal of Production Economics219, pp.328-340.

Maka, B. and Suresh, N., 2018. Review of Financial Performance analysis of Corporate Organizations. Asian Journal of Management9(1), pp.500-506.

Nizam, E., Ng, A., Dewandaru, G., Nagayev, R. and Nkoba, M.A., 2019. The impact of social and environmental sustainability on financial performance: A global analysis of the banking sector. Journal of Multinational Financial Management49, pp.35-53.

Nufus, K., Supratikta, H., Muchtar, A. and Sunarsi, D., 2020. Analysis of Financial Performance: Case Study of PT. X Employee Cooperative. Utopía y praxis latinoamericana: revista internacional de filosofía iberoamericana y teoría social, (10), pp.429-444.

Sardo, F., Serrasqueiro, Z. and Alves, H., 2018. On the relationship between intellectual capital and financial performance: A panel data analysis on SME hotels. International Journal of Hospitality Management75, pp.67-74.

Xie, X., Huo, J. and Zou, H., 2019. Green process innovation, green product innovation, and corporate financial performance: A content analysis method. Journal of business research101, pp.697-706.

Financial Markets, Instruments, And Institutions Essay Sample For College

Introduction

In both established and emerging economies and financial markets, it is widely agreed that housing bubbles are a common phenomenon. According to Muller et al. (2010), the changes in demand and supply, shifts in population trends, growth in households, shifts in purchasing power, irrational and speculative behavior, and changes in purchasing power due to tax deduction, affordable credit, and monetary policies all contribute to the creation and influence of housing bubbles around the world. As a result of several empirical investigations, monetary policy has been statistical and econometric significance on housing bubbles in countries.

The Federal Reserve’s monetary policies before the 2008-2009 housing crisis have been widely criticized for being too loose. As a result of the contractionary measures implemented by the Federal Reserve, Greenspan (2009) claims that housing values fell in the United States, China, and many other European nations. The paper examines how the U.S and China’s housing bubbles have been affected by monetary policy using these ideas as a foundation in this study.

Monetary Policy and Housing Bubbles

Since the commodification and privatization of China’s residential real estate in 1998, the Chinese housing sector has seen phenomenal economic development. For example, according to Wu (2015), the Chinese real estate market was worth $ 13.4 trillion by the close of 2009, more than three times the country’s entire GDP at the time. As part of its mission to maintain low but steady inflation and spur economic growth in China, the People’s Bank of China, China’s central bank, has implemented monetary policies that have contributed to a surge in real estate prices (Wu, 2015). Economic analysts and Chinese officials are increasingly worried about the hazards of monetary policy-related housing bubbles in China. The concerns stem from the expansionary and contractionary monetary policies followed by the People’s Bank of China during and after the global economic downturn of 2008.

A variety of expansionary monetary measures, such as a rise in bank loans, an incline in money supply, and decreases in interest rates, were approved and implemented by the PBC to help the economy recover from the 2008-2009 economic downturn (Hu, 2012). Aside from that, the PBC also lowered the needed percentage of a home’s buying price as a down payment (Hu, 2012). This resulted in a robust response in the Chinese real estate market to the expansionary monetary policy policies above. As a result of the PBC’s monetary policies implemented in early 2009, the national house price index jumped from -1.1 percent in the 1st quarter to 5.8 percent in the final quarter (Xu and Chen, 2012).

PBC subsequently implemented a series of measures to tighten China’s monetary policies, including hiking interest rates and the reserve requirement and increasing the minimum compulsory down payment for house purchases, starting in the 2nd quarter of 2010. Additionally, the Chinese property market reacted quickly to the measures mentioned earlier of contractionary monetary policies. Furthermore, the monthly home price growth rate declined from 2.55 percent at the start of 2010 to 0.15 percent at the close of the 3rd quarter of the year (Xu and Chen, 2010). House prices continued to fall during much of 2011 and 2012, with the most significant reduction occurring in the first half of 2012. Interest rate reduction, rising money supply, and some other expansionary monetary policies have a considerable positive impact on housing prices, while also time, changes in expansionary monetary policies have a negative effect on housing prices.

The subprime lending policy has been primarily blamed for the United States housing market breakdown between 2008 and 2009. Low credit scores and poor credit histories, which prevent many people from getting a conventional mortgage, were made eligible for home loans under this strategy. Lenders gave “ninja loans,” a phrase used to characterize a form of mortgage given to persons with no income, no official word, and no assets, which caused the American housing bubble of 2008. Interestingly, home loans were provided without a down payment in the first place (Gotham 2009). When the teaser interest rates rose, borrowers found it increasingly challenging to make principal payments. Furthermore, many investors believed that they had been provided substandard loans that, if pooled, would not go bankrupt and that, given the rising value of homes, they had no need to be concerned (Gotham, 2009). Because many borrowers did not refinance their mortgages, this assumption proved erroneous, resulting in the U.S. housing bubble.

Moreover, the residential market in the United States has been in instability for a decade because of poor investment (Barth, 2009). However, economic analysts warn that the latest wave of subprime mortgages and foreclosures pose substantial hurdles to the American housing market, which will take a lot of time to recover from, despite significant progress being made. Debt defaulters were given a variety of financing options in 2006, which is widely thought to have led to the 2008-2009 housing market crisis in the United States. The subprime mortgage crisis was caused by banks and mortgage brokers offering loans to anybody who wanted them to fulfill the demand for mortgage securities.

In addition, Economic experts claim that weak monetary policy by the Federal Reserve was indeed the fundamental cause of the subprime mortgage-backed securities (MBS) market’s collapse, which revealed the American real estate market to irrational exuberance culminating in the housing bubble. In contrast to earlier analyses, this article claims that the property bubble witnessed in the United States between 1998 and 2008 was mainly attributable to lower interest rates. Significantly rising housing prices in the United States occurred between 2000 and 2005, mainly due to monetary policies like lower interest rates, more credit availability, increased financial security, and an expansion of the subprime mortgage industry.

The government’s efforts to improve U.S. economic circumstances and boost house ownership are directly responsible for housing market development (Barth, 2009). It is common knowledge that rising house prices and home sales have sparked the establishment of new houses and a rise in spending on furniture and other home-related items. The housing market in the United States performed well from the 1970s to 2005, as seen by rising demand, rising prices, and new buildings. Government programs aimed at increasing the number of people who own their own homes resulted in significant advantages. For instance, by the end of 2005, the percentage of Americans who owned their own houses had risen from 64 percent to 69 percent (Ortalo-Magne & Rady, 2016). A 5 percent rise in property ownership may seem tiny at first glance.

However, by the close of 2005, more than 6 million families had purchased their own houses. Following monetary measures in 2005, the American property market reacted ferociously, leading to unparalleled housing bubbles throughout the nation. There were also monetary policies enacted in Europe that liberalized credit and property markets, and this had a substantial impact on the housing bubble in the U.K, particularly in Germany (Dombret, 2015).

Critical Analysis

There are two basic ways in which monetary policy influences housing bubbles. The domestic channel is the most popular and often reported on. According to the evidence, reductions in interest rates and a growth in the money supply, as seen in the U.S and China, may raise household incomes. In turn, rising household income leads to more investment in the housing market, driving up the price of homes and other real estates (Dokko et al., 2011). The opposite is valid for a monetary policy of contraction. It is also possible to borrow money from banks and other financial entities. The cost of purchasing a home tends to rise when lending institutions raise their interest rates and tighten their loan requirements. There is a decline in the demand for houses and associated properties from homeowners, which causes housing prices to rise and fall.

There is a lot of literature to back up this claim that monetary policy contributes to housing bubbles. Tsatsaronis and Zhu (2014), for example, found that interest rate cuts and other forms of expansionary monetary policy had a considerable effect on property prices in developed nations. In addition, Iacoviello and Minetti (2013) found a negative link between house prices and more restrictive monetary policies. According to the research findings, the European estate market reacted severely to the effects of higher interest rates and tighter money supply rules. The expansionary monetary policy raises property values, whereas tightening monetary policy lowers them (Koivu, 2012). Based on this insight, the PBC may use the offered interbank short-term interest rate as an effective and dependable economic, monetary policy to combat housing bubbles in the nation.

As a result, it is sufficient to say that monetary policy is the primary influencer of housing bubbles in developing and developed nations. Prices for homes rise faster when monetary policy is expansionary, whereas prices rise slower when monetary policy is contractionary, leading to global housing booms. Governments must use economic, monetary policy instruments like money supply and short-term interbank rates of interest to deal with the housing bubble crisis successfully. Using these mechanisms, the housing market becomes more open to both the good and negative monetary policy impacts.

Conclusion

Conclusively, the monetary policy may significantly impact housing bubbles in developing and developed economies. Prices for homes rise faster when monetary policy is expansionary, whereas prices rise slower when monetary policy is contractionary, leading to global housing booms. Examples of PBC’s expansive monetary policies include raising bank lending limits, reducing interest rates and smaller necessary down payments for first-time home purchasers, and expanding the money supply in China and other Asian countries. Consequently, the Chinese real estate market responded significantly to these expansionary policy monetary measures as seen by the 6.9% incline in the national house price index between the start and final quarter of 2009.

The PBC enacted the contractionary and restrictive measures in 2010. As seen by the sharp dip in the number of real property transactions and the subsequent drop in home prices, China’s housing market responded aggressively to these monetary measures. There were similar effects on house prices of monetary policy in the United States between 2006 and 2010. As a result, governments should explore using market-based monetary policy mechanisms like short-term interbank interest rates and controlling the amount of money in circulation.

Reference List

Barth, J., 2009. The rise and fall of the US mortgage and credit markets: a comprehensive analysis of the market meltdown. John Wiley & Sons.

Chen, S., Wei, W. and Huang, P., 2019. The impact of monetary policy on housing prices in China. Available at SSRN 3355856.

Dokko, J., Doyle, B.M., Kiley, M.T., Kim, J., Sherlund, S., Sim, J. and Van Den Heuvel, S., 2011. Monetary policy and the global housing bubble. Economic Policy26(66), pp.237- 287.

Dombret, A., 2015. The German real estate market-cause for concern? Available at: http://www.bis.org/review/r150202c.pdf.

Gotham, K.F., 2009. Creating liquidity out of spatial fixity: The secondary circuit of capital and the subprime mortgage crisis. International journal of urban and regional

Greenspan, A., 2009. The Fed didn’t cause the Housing Bubble. Available at: https:www.wsj.com/articles/SB123672965066989281.

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