Changing Housing Wealth in the UK, 1985–1993: Household Patterns and consequences
| Published date | 01 September 1998 |
| DOI | http://doi.org/10.1111/1467-9485.00107 |
| Date | 01 September 1998 |
| Author | Duncan Maclennan,Yong Tu |
II
NTRODUCTION
This paper is primarily concerned with housing prices and equity and, at a first
reading, may appear to be tangential to the special issue theme of ‘Housing
Markets and Economic Flexibility’. In the past, microeconomic analyses of the
interactions of these important markets has f ocused either on the implications of
housing system outcomes for labour mobility or, the effects of employment and
labour market outcomes, such as employment and income levels and certainties,
on choices of housing tenure, quality and location. Macroeconomic studies,
until the 1990s, have been even more narrowly focused. They have implicitly
ignored the mobility features of housing markets and emphasised how changes
in aggregate demand drive housing system outcomes, with, since the 1980s , the
traditional concern for induced changes in housing output paralleled by a new
interest in house price effects.
The conventional Keynesian perspective on the housing sector did allow for a
significant, multiplier feedback from housing starts through construction
employment to aggregate demand. But this theoretical perspective emphasised
the income/employment to housing sector links and causality and the consider-
able reductionism involved was even more apparent in early macro-economic
models incorporating housing price effects. In the late 1980s modelling was
rather overtaken by events as models increasingly failed to explain aggregate
consumption behaviour (Meen, 1996 ).
During the ‘long-boom’ of the 1980s (ending in 1988/89) UK nominal house
price rises outgrew the RPI (see Wilcox, 1997 ). The share of housing assets in
personal sector wealth peaked at 42% in 1989, fell back to 38% in 1993 and
subsequently only moderately recovered to 39% by 1995. At the same time
financial liberalisation and mortgage market competition facilitated mortgage
loan growth faster than total personal sector debts and incomes. Housing equity
withdrawal rose to unprecedented heights, approximating 6% of GDP in 1989,
but had fallen to around zero by 1995. This economic history generated a new
interest in the role of housing, and housing wealth in particular, in the national
economy. This interest was stimulated further when the low inflation downturn
of 1989 –1992 was manifested in f alling nominal house prices. Throughout
most of the postwar period adjustment to housing price upswings had been
447
Scottish Journal of Political Economy, Vol. 45, No. 4, September 1998
© Scottish Economic Society 1998. Published by Blackwell Publishers Ltd, 108 Cowley Road, Oxf ord OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
CHANGING HOUSING WEALTH IN THE UK,
1985– 1993: HOUSEHOLD PATTERNS AND
CONSEQUENCES
Duncan Maclennan* and Yong Tu**
*University of Glasgow
**University of New South Wales, Australia
achieved, with real house price falls, through nominal house price increases
below the RPI.
There has been extensive debate, usually based on macroeconomic studies, of
how, indeed whether, rising then falling house prices accelerated the 1980’s boom
and elongated the post-1992 recovery. Aside from the usual housing output
multiplier effects, Dicks (1990) argued that housing transaction volumes , as
moving households extracted equity and boosted consumption, were the main
transmission mechanisms for housing wealth effects. Financial liberalisation,
rather than rising real housing wealth per se, was advanced by Miles (1994 ) as the
critical influence on changing housing-economy interactions. Indeed he argued
that housing wealth changes would have little effect on aggregate consumption as
one household’s wealth gain was simply another’s loss. Muellbauer adopted a
more eclectic approach, in a series of studies reflected in Muellbauer (1997), in
which house price changes directly affected upswing labour mobility and inflation
and in which both real wealth changes and financial liberalisation interacted to
create a more potent link from housing wealth, through consumption, to the
economy. More recently, for the 1992– 1996 recovery period, Maclennan and
Meen et al. (1997) report that house price/wealth hangover effects from the
1989– 92 recession had slowed housing market recovery but to a lesser extent than
shifts in the wage share, which reflected growing labour market flexibility.
All of the above studies produced plausible econometric results and the
collinear nature of the variables and processes involved, at least at the national
scale, makes selection of a ‘preferred’ model or explanation difficult. At the
national scale, house prices, equity withdrawal , housing turnover and financial
de-regulation (a continuous process and not a single act) all moved together.
Housing systems do however, have important local dimensions. Different
regions whilst, say, subject to the same interest rates and financial regimes , may
exhibit different timings and amplitudes in employment and house price cycles
and this regional variety has been used, for example, Muellbauer and Murphy
(1995), Carruth and Henley (1993), to probe housing market-economy effects.
However, even within regions individual households differ in their housing loan
and asset positions and house price appreciation rates may differ in local
submarkets for protracted periods. A third of UK households, renters, have no
housing assets. Higher income households have higher stocks of housing assets
and housing consumption, and the assets required to produce housing services,
vary over the life cycle.
In consequence, both across and within regions, there is likely to be con-
siderable variety in household housing wealth and changes in these magnitudes
over time. This paper, using two related data-sets covering the UK housing
boom and bust period 1985– 1993, examines this variety and , for the
1989– 1993 period, its relationship to household spending and labour market
moves for individual households. The samples, and the results, are not national
and the research techniques are not confined to econometric estimation. They do
not produce an ‘alternative’ explanation of the last decade of UK housing
market experience but they do illustrate the need for grander macro-modelling
to be based on a more convincing set of ‘stylised f acts’ or micro-foundations.
448 DUNCAN MACLENNAN AND YONG TU
© Scottish Economic Society 1998
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