Academic journal article National Institute Economic Review

Commentary: The Housing Market and the Macroeconomy

Academic journal article National Institute Economic Review

Commentary: The Housing Market and the Macroeconomy

Article excerpt

"People want a home they can call their own."

Margaret Thatcher, Party Political Broadcast on housing and rates, 28 August 1974.


It might only be just a little too strong to argue that the housing market dominates our national life. Whilst economists, if they consider housing at all, would think of the consumption of housing services as another aspect of the basket of goods and services bought, like clothing or food, most people would place the decision on the location and type of their accommodation as critical to their sense of well-being if not their very identity. Indeed accommodation may not only represent the key to understanding people's perception of their own status but as the critical determinant of the wealth as it operates as a vehicle for household saving.

So the first question we might ask ourselves is what do we buy when we buy a house? Essentially we buy the permanent value of flow of accommodation and amenities provided by the house in any particular location. For the most part we also buy the land, or a fraction, of the land on which the house is built. The value of the house then should be something close to the present value of those housing services over the lifetime of the house minus the costs of repair and maintenance plus the value of the land. It is thus not immediately clear why prices should appreciate markedly as it would require sharp revisions to the value of housing services, the underlying value of land or changes in the rate at which we discount the future. But as we shall see they have appreciated markedly.

While the number of households has increased by 30 per cent from 1981 to 2014, the population increased by only 14.6 per cent over the same period. And within that the number of households who are owner occupiers has grown dramatically (figure 1). There were just under 12 million in 1980 and this peaked at just over 18 million in 2008. And although the fraction of householders who were homeowners peaked at around 70 per cent in the early part of this century and declined to some 62 per cent by 2014, the increase in home ownership almost directly offset the scale of local authority housing provision over the same period. Since the early part of this century there has, though, been an increase in those renting privately and from housing associations.

A good on which we place a higher preference might be one to which we devote a considerably higher fraction of our income. And indeed as far as household expenditure, which is an outcome rather than a preference, is concerned we have increased the share of our expenditure on housing (including expenses such as mortgage interest, rent, council tax and maintenance) from 9 per cent in 1957 to 18 per cent by 2016 (ONS, 2017). We have similarly increased our expenditure on leisure goods and services from 8 per cent in 1968 to 19 per cent in 2016. Taken together these seem to imply a society more geared to consuming local amenities and leisure than in the immediate postwar period, perhaps more in line with the optimistic hopes a century ago than we might have thought (Keynes, 1930).

Asset price performance

Economists are mostly concerned with the evolution of prices and quantities in a market and, if we for a moment hold the quantity of land as fixed, the secular rise in house prices is quite remarkable. It is no simple matter to construct a house price index but it would appear that the representative housing unit increased some six-fold relative to the price of consumption goods, since the end of WW2, compared to some three-fold increase in equities (figure 2). At least at face value the purchases seem to have offered a good return.

The purchase of housing is often (but not always) a leveraged purchase where the purchaser borrows a large fraction of the underlying price and places a limited amount of equity into the asset. As with all leveraged buy-outs, this type of purchase allows a much higher return on equity than an outright purchase. …

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