Developments in the housing market have important implications for the economy as a whole and for policy. Apart from the direct effects such as investment in dwellings (which accounted for more than 70% of total personal sector savings last year) there are a number of ways in which the housing sector interacts with the rest of the economy. For example, an increase in house prices raises personal sector wealth, thus possibly influencing households' consumption/savings decisions. Recent changes in the mortgage market, following a period of deregulation and intense competition, have made this wealth more accessible. Also, if house prices rise faster than earnings, upward pressure on wage settlements may result, perhaps over and above that which emerges through the contribution of higher housing costs to the retail price index. In addition, variation in the rates of growth of house prices across different regions may reduce labour mobility, thus reducing the efficiency of the national labour market. These developments are important and have wide-ranging implications for monetary policy. First, the sensitivity of personal sector behaviour to changes in interest rates has almost certainly grown in recent years. Second, the use of interest rates to reduce inflation may have repercussions for the housing market as a whole-as regards demand for and supply of both new dwellings and improvements to the existing stock and the operation of the mortgage and credit markets.
This article examines developments in the housing market over the last two decades, considering the various factors which have been important in explaining changes in house prices, housing starts and completions, and housing investment. As well as considering the long-term prospects for the market, a short discussion of likely short-term developments in the light of recent interest rate rises is included: this analysis suggests that the housing market will slow considerably this year. The implications of such a slowdown for the growth of consumers' expenditure and for the labour market are also considered. Finally, the article discusses some of the policy implications of this analysis.
Published on
01 March 1989
The housing market