Home > History, Monetary Policy > “Londonism”, or Macro Models Based on Reasoning from Changes in London House Prices

“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.

Categories: History, Monetary Policy
  1. james in london
    May 12, 2014 at 10:43

    Great post. Still waiting in the London suburbs for the ripple effect on my house price, though. I can’t see why the price per sq foot of my house is 1/3 that of Clapham an mere 15 minutes up the main railway line. What is so great about the tube?

  2. PT
    May 12, 2014 at 20:25

    House price growth is still relatively muted here in the North East. Hopefully we’ll see some decent double digit gains soon.

    It hasn’t been all bad though. The ultra low base rate and government support of the mortgage market has ensured mortgage payments are pocket money and rental profits very good indeed.

    • May 13, 2014 at 08:18

      Maybe the pain of the NE’s 9-10% unemployment rate is just not enough… a bit more suffering needed?

  3. May 15, 2014 at 12:30

    Does Mark Carney read this blog? Very encouraging comments yesterday. Chris Giles is on acid this morning in the FT. Or just out to cause mischief on behalf of Ed Balls. Not the pink paper for nothing.

    • May 15, 2014 at 13:28

      The responses about London & house prices were fantastic.

      I think Chris is annoyed about the unpredictable swings in policymaking and as a supporter of policy rules I agree with that critique of Carney and the MPC. But I think it is bizarre that the press is so hawkish at the moment, we are only a year on from the doom and gloom of triple-dip, and inflation has collapsed.

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