“Londonism”, or Macro Models Based on Reasoning from Changes in London House Prices
We need an name for a macro model in which changes in house prices drive changes in aggregate demand. I am going to suggest “Londonism” because this idea seems to be a metropolitan obsession, though better suggestions would be welcome. I will continue be snarky, annoying, and contrarian in my neutral slash positive view of rising nominal asset prices.
This is the Guardian from June 2008, when the UK was already in recession, though we didn’t have the GDP figures to show that yet:
Amid City fears that the Bank of England’s decision yesterday to peg the cost of borrowing at 5% could push the economy into recession, the Halifax, Britain’s biggest mortgage lender, reported that the cost of a home fell by 2.4% in May, wiping almost £5,000 off the cost of an average house.
Back in 2008 those naive City economists didn’t realise that when house prices fall, people can buy more houses. That’s how it works, right? Falling prices mean housing is “more affordable”, rising prices mean “less affordable” houses? No? Am I missing something?
Remember also that monetary policy was “doing all it could” to prevent the global financial crisis from escalating into a UK recession, but yes, Bank Rate continued to be pegged at 5% all the way to October that year. The Graun continue:
Last month’s decline marked the seventh fall in nine months. In the past three months, prices have dropped by 6.1% – faster than at any time since the bank began publishing data in 1983. The biggest fall during the downturn of the early 1990s was the 3.8% decline between August and October 1992, a period which included Black Wednesday.
Wait, there is some link between recessions and changes in house prices? What can it be? Find me a Londonist… Mr. Bootle?
Roger Bootle, economic adviser to Deloitte, said the 8% drop in house prices since their peak was likely to turn into a fall of 20% by the end of 2009, with knock-on effects on consumer spending. “The UK economy is on course for a very deep and prolonged economic downturn, if not an outright recession,” he added.
Ah, there we go. “Knock-on effects” from falling house prices. Mr. Bootle was right about the “outright recession”, but I’d suggest the Bank of England is right about the cause.