Oxford Review of Economic Policy - current issue

Housing markets and the economy: the assessment

Muellbauer, J., Murphy, A. — 2008-06-24

Housing markets have multiple interactions with the rest of the economy and these are surveyed in this paper. The drivers of house prices include income, the housing stock, demography, credit availability, interest rates, and lagged appreciation, the latter a potential mechanism for overshooting. There is rather less agreement on the determinants of new construction, though planning constraints are widely seen as a major issue and one of the causes of the UK housing affordability problem. The paper argues that housing collateral and downpayment constraints are the key to understanding the role of house-price variations in explaining medium-term consumption fluctuations. Institutional variations between countries and over time account for major differences in linkages between house prices and economic activity. This illuminates debates about how monetary and other policy should react to house-price variations. The paper also discusses the role of housing markets in explaining regional migration and location decisions, intergenerational inequality, and restricting access of the less affluent to public goods, such as good schools, which are capitalized in local house prices.

Planning policy, planning practice, and housing supply

Barker, K. — 2008-06-24

This paper outlines a brief history of planning policy in England as it relates to housing. It discusses briefly the issues raised by a plan-led system, and the uncertainties of household projections. Evidence on the relationship between house prices and housing supply, and on house-builders’ landbanks, suggests that planning constraints are a key factor behind the long-term upward trend in house prices (though over shorter periods other factors, such as long-term real interest rates, will be more important). It concludes that the environmental constraints on additional housing supply, albeit important, can be overstated. While there are serious adverse social consequences of the way in which the English housing market works today, it is not yet clear that the (largely welcome) policy steps taken over the past 3 years will prove sufficient to resolve this problem.

Reflections on the nature and policy implications of planning restrictions on housing supply. Discussion of 'Planning policy, planning practice, and housing supply' by Kate Barker

Cheshire, P. — 2008-06-24

Planning is about other things as well, but it is fundamentally an economic activity. It allocates a scarce resource but independently of prices or any market information. In analysing the effects this allocative mechanism has on housing supply (or, indeed, the supply of buildings for any given use), we need to think carefully about what exactly it is that planning allocates and whether, in its operation, it creates a constraint on the supply of what it is allocating. In the British case, our planning system does not operate on the supply of housing directly, but indirectly via the constraint imposed on land supply. Given the income elasticity of demand for space this has policy implications perhaps even more serious than is acknowledged by Barker.

Spatial patterns of development and the British housing market

Leunig, T., Overman, H. — 2008-06-24

The government wants 3m houses built by 2020. Economic theory tells us their locations matter for living standards. Economics cannot tell us the optimal locations, but does show that houses are usually socially more valuable in high land-price areas, because additional workers are more productive in such places. Land-price data and evidence on urban agglomeration economies point to a significant rise in the optimal sizes of some UK cities and that optimal locations have moved from industrial-revolution cities towards the South-east. As a result, significantly expanding London, its commuter satellites, and other high-skill places in the UK, but particularly in the South-east, is likely to generate substantial rises in wages and living standards. In these places the planning system dramatically constrains the economy from responding with nineteenth-century dynamism, when new economic opportunities led some towns to grow dramatically.

Planning for housing in the post-Barker era: affordability, household formation, and tenure choice

Meen, G., Andrew, M. — 2008-06-24

The Barker Review of Housing Supply recommended the greater use of market indicators as the basis for providing sufficient land for future housing requirements. Worsening affordability would be a sign that more land is required. However, the traditional approach to land release used by planners is based on trend household projections. The paper shows that this will typically lead to worsening affordability over time. The paper, therefore, develops an alternative economic model more suitable to the post-Barker era, covering both household formation and tenure choice. The model is used to analyse a range of policy issues, including raising home-ownership rates and home-ownership sustainability.

Valuing school quality, better transport, and lower crime: evidence from house prices

Gibbons, S., Machin, S. — 2008-06-24

Housing prices within urban areas exhibit highly localized variation that cannot be explained solely by differences in the physical attributes of dwellings. We consider the role of local amenities and disamenities in generating price variation within urban areas, focusing on three highly policy-relevant urban issues–transport accessibility, school quality, and crime. Our survey of the recent empirical literature highlights what is known and what is not known on these issues, and considers the relevance and reliability of this evidence for policy design and evaluation. Although there are serious empirical challenges, we argue that research on housing values based on careful research designs can offer credible estimates of the social value of place-specific attributes and amenities.

Sources and uses of equity extracted from homes

Greenspan, A., Kennedy, J. — 2008-06-24

In this paper, we present estimates of the disposition of the free cash generated by home equity extraction to finance consumer spending, outlays for home improvements, debt repayment, acquisition of assets, and other uses. We estimate free cash as cash available net of closing costs and repayment of other mortgage debt. We have also extended the quarterly data series for gross equity extraction, presented in our earlier paper (Greenspan and Kennedy, 2005), back to 1968.

Financial innovation and European housing and mortgage markets

Miles, D., Pillonca, V. — 2008-06-24

In this paper we assess the recent history of house prices and of mortgage lending across Europe. We develop a simple economic framework to estimate the likely contributions of fundamental factors, such as changes in real incomes and population growth, to house price appreciation. We also try to quantify how much of price rises might have been driven by rising expectations of future capital gains. We estimate that this might have played a significant role in several countries, including Spain, Sweden, Belgium, and the UK. We then consider what different types of mortgage arrangement might become attractive in a world of higher house prices, analysing types of indexed mortgage that have advantages where prices are higher relative to incomes and where house prices may be volatile and cannot be assumed to carry on rising.

Discussion of 'Financial innovation and European housing and mortgage markets', by David Miles and Vladimir Pillonca

Honohan, P. — 2008-06-24

Although their paper stresses the potential merits of a particular financial innovation—a form of shared-ownership indexed contract—Miles and Pillonca surprisingly neglect the role of differential surges of financial innovation in explaining cross-country differences in house-price inflation. The risk-reducing potential of their favoured instrument deserves further analysis, not least because of the sizeable political risk involved: the experience of several other countries that have used indexed mortgage contracts shows their limited robustness to macroeconomic shocks.

House prices, money, credit, and the macroeconomy

Goodhart, C., Hofmann, B. — 2008-06-24

This paper assesses the links between money, credit, house prices, and economic activity in industrialized countries over the last three decades. The analysis is based on a fixed-effects panel vector autoregression, estimated using quarterly data for 17 industrialized countries spanning the period 1970–2006. The main results of the analysis are the following. (i) There is evidence of a significant multidirectional link between house prices, monetary variables, and the macroeconomy. (ii) The link between house prices and monetary variables is found to be stronger over a more recent sub-sample from 1985 to 2006. (iii) The effects of shocks to money and credit are found to be stronger when house prices are booming.

Discussion of 'House prices, money, credit, and the macroeconomy' by Charles Goodhart and Boris Hofmann

Price, S. — 2008-06-24

Goodhart and Hoffman aim to examine causal and other links between house prices, liquidity, and activity, and this note comments on their results. One part of the mechanism is via wealth—but arguably house-price changes have little net impact on wealth, although there are collateral effects. The authors clearly establish strong empirical links between the variables examined. The main practical issues are to do with identification of the source of shocks and therefore on the interpretation of the results.