Housing and the British Economy

Here are some charts of recent developments in the UK housing market and some revision notes on the impact of the housing recession on macroeconomic performance

The housing market plays a key role in shaping macroeconomic performance. Millions of jobs are linked directly or indirectly to the property / construction sectors. And - over time, there are potentially strong household wealth effects of changes in property prices on consumer confidence, borrowing and demand and incentives to save

0ver 70 per cent of homes in Britain are owner-occupied
A home mortgage is perhaps our biggest financial commitment
Construction accounts for approx 7% of GDP
Housing-related spending is perhaps 15% of AD
Strong multiplier and accelerator effects when the property sector is expanding – but these can go into reverse as we have seen during the recent property slumpo
The UK housing market appears more vulnerable than in other countries to price volatility and the risk of property bubbles
(i) Majority of loans are on floating (variable) interest rates
(ii) Low price elasticity of supply of new housing

The housing recession has led to:
*An improvement in housing affordability although many people still find it hard to get a mortgage because of tighter lending criteria
*A reduction in property-fuelled consumption
*A partial improvement in the UK trade deficit
*Sharply lower employment in construction and a deep cut in the rate of new housebuilding
*A more sober assessment of risks and returns of home-ownership
*Greater government policy focus now on expanding the improving the stock of social housing
*Cheaper commercial property provides opportunities for entrepreneurs

Property bubble from 1995-2007 was a key factor creating macroeconomic imbalances such as a falling savings ratio and excessive leverage of homebuyers
Millions of property owners have suffered from inflation-illusion – now they suffer collateral losses
Debt deflation in property market will be a major constraint on demand/economic growth in the recovery years. Hundreds of thousands of property owners are experiencing negative equity
But will the recession lead to an opening up of land for new housing supply?
House prices now rising but not because of macroeconomic fundamentals but largely because of a shortage of properties on the market