The high cost of buying or renting a home relative to household incomes has profound implications for national productivity, wealth inequality and financial stability. Policy-makers need to pay far more attention to the links between housing and the broader economy.
Over the past two decades, and in common with most other OECD economies, the UK has experienced what is often described as a housing affordability crisis (Meen and Whitehead, 2020). While the precise definition of affordability is a little vague, especially across different countries, it is clear that we have seen the emergence of a suite of problematic outcomes relating to house prices, rents and mortgage costs rising ahead of household incomes.
Homelessness (with markedly different definitions from country to country) has risen. Burgeoning unmet housing needs and payment burdens in rental markets – especially for those on the lowest incomes – have also increased.
Affordability pressures in the home ownership sector have increased precarity for more marginal owners. At the same time, they have raised entry-level prices to the extent that fewer households whose members are under 35 years old are able to buy homes for the first time. What’s more, the overall share of homeownership is now falling in multiple countries (OECD, 2021; Maclennan et al, 2021; Meen and Whitehead, 2020).
These problems were unresolved before Covid-19. Despite some short-term improvement in outcomes for homeless and lower-income renters arising from pandemic policies that have now come to an end, the problems have been substantially exacerbated by big hikes in house prices and rents since late 2020 (Pawson et al, 2021).
Although there are multiple causes of these difficulties (and the causes differ in importance between countries), the fact that house prices and rents are rising faster than increasingly unequal incomes lies at the heart of the problem.
Government resources for reducing these difficulties by ‘business as usual’ policy approaches are now widely constrained, particularly in the context of high inflation and public debt. Current economic conditions are both difficult and uncertain.
What policies might be effective?
Research has typically emphasised that housing market outcomes are driven by major economic influences – such as interest rates and inflation – as well as growth in incomes and household formation (Meen and Whitehead, 2020; OECD, 2021). Decades of evidence make clear that housing outcomes can also have important recursive effects on emerging phases of economic change.
Three new articles published on the Economics Observatory this week make the case that economic and housing policies need to pay far more attention to the links between housing and the broader economy. In particular, they should focus on the nature and weight of recursive ‘housing to economy’ feedbacks.
Primarily, this applies to the long-run effects of rising real house prices and rents. Doing so could shape better housing outcomes and alleviate fiscal and inflationary pressures.
Housing outcomes need to be understood as a set of multi-sector attributes that affect not just housing costs and total housing output, but also quality, energy efficiency, location and tenure. Each of these factors has different links to local and national economic systems, and they may matter over different time periods.
For example, house price and wealth outcomes shape current dilemmas related to policies to stabilise the economy.
It is also clear that housing market outcomes, which largely reflect the effects of house price increases and rising housing wealth, are having a much wider range of negative, recursive impacts. These affect not just financial and economic stability, but also inequalities of wealth and income.
A wider range of housing outcomes related to proximity to good schools, good jobs and good transport links can also affect a country’s growth and productivity.
Despite the potentially important recursive economic effects of housing outcomes, few countries have developed coherent governance structures for housing and the economy at national and local levels, let alone linking them.
National housing market strategies (in what are now primarily market-driven housing systems) are mostly missing, and traditional housing policy often focuses on increasingly residual policy for ‘merit good’ actions. For example, policy responsibility for containing house prices is at best fuzzy and often undefined.
The articles published in this series suggest that policy-makers focused on housing can often ignore economic evidence. This has led to both sub-optimal housing and economic outcomes. Obsolescent analysis, governance and narratives about housing policy have persisted into contexts for which they were not designed.
Households and firms in the UK (and across the OECD) now pay an excessive cost for poor housing policies. Rethinking how housing markets operate and how they are managed and mismanaged by policy could lead to improvements both in housing and overall economic performance.
Observatory news
- We have just launched a new digital archive for ECO Magazine. You can now read the past issues in an interactive eBook format (or a copy to read offline). Keep an eye out for a new issue, coming soon.
- Applications for ESRC policy fellowships are now open. Applications close on 20 April 2023. This initiative offers funding to collaborate with a UK or devolved government host or What Works Network centre on research activity to address pressing national and global challenges.
- Colleagues at the London School of Economics (LSE) have helped develop a new 'WFH Map'. The team of researchers joined forces with Lightcast, a labour-market analytics firm, and developed a text algorithm capable of measuring offers of remote work (i.e., one or more days per week at home) directly from the raw text of online job vacancy postings. Their dataset spans the near-universe of new online job vacancy postings, and currently contains over 250 million documents.
