Introduction

The last chapter emphasized that changes in affordability are not independent of the macroeconomy. Indeed, it can be argued that general monetary and fiscal policies are more important influences than policies explicitly aimed at the housing market. But it is also the case that developments in housing markets affect the macroeconomy – the interactions are, therefore, bidirectional – and this has to be taken into account in macro stabilization policies. An expanding literature demonstrates the ways in which housing and housing finance contribute to the generation of macroeconomic cycles. The importance of debt deflation was first recognized in the 1930s, but more recent work formalizes the role of household mortgage credit which, as we showed in the last chapter, has grown rapidly since the liberalization of mortgage markets in many countries. This strand of research became particularly important in the light of the GFC, although work had begun well before this date. Research also indicates that a rise in the household debt to income ratio may subsequently lead to lower growth in GDP.

Credit cycles are, by no means, the only way in which housing affects the macroeconomy, although they have received most attention recently and are the primary focus of this chapter. In addition, housing and housing taxation affect labour mobility and, so, can influence national productivity, regional economic performance and local disparities. In summary, this chapter includes both analytical and policy elements and so bridges the divide between the two parts of the book. It shows why housing has become more integrated into general macroeconomic policy, which adds further constraints on the setting of independent housing objectives. For example, the need for macro stabilization led to the controls on lending discussed in the last chapter.

In the UK, initial research on housing and the macroeconomy took place in the late 1980s and concentrated on the relationship between housing and consumers’ expenditure and this was subsequently extended to other countries. In addition, a considerable amount of theoretical and empirical research began to be conducted into the transmission mechanisms through which housing markets could affect consumption. Initially, research concentrated on housing as a form of wealth, but has subsequently been refined and the role of housing as a means of providing collateral in imperfect capital markets has been stressed.