Morten Ravn's picture
Affiliation: 
University College London
Credentials: 
Professor of economics
Head of Department

Voting history

House Prices and the UK economy

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Question 2: Do you agree that a more widespread weakening of the UK housing market will slow UK GDP growth significantly?

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Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
Should house prices drop significantly, the consequences could be dire at least in the short to medium term due to the impact on households. This would be exacerbated by increasing interest rates and one might be worried about the stability of the economy especially in case of a non-orderly Brexit outcome. On the other hand, UK house prices are crazy and many UK households use housing as their main savings vehicle which seems inefficient and may be one of the factors behind the low productivity of the UK economy. A dis-orderly Brexit could further worsen this issue if there are negative effects on the UK economy's competitiveness due to loss of access to the EU internal market. This would suggest that introducing capital gains taxes (to make housing less attractive as a savings vehicle) could help address both the high cost of housing in the UK and the UK's poor productivity performance. It's hard to see that this would be politically feasible though.

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Question 1: Do you agree that the phenomenon of declining house prices will ripple out from the London property market leading more UK regions to experience falling prices?

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Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
If there is a large drop in London house prices, I do think it will spread to the commuter belt and beyond. But things are still very uncertain. At this very point in time, uncertainty effects probably dominate but there are also fundamental issues going on in the background. On the demand side, London real estate prices will be sensitive to how Brexit negotiations work out for a variety of reasons. First, the fate of the financial sector will be important for determining higher end demand. Secondly, more broadly, the impact of Brexit on trade and therefore on household permanent income will impact on demand. Third, the nominal exchange rate will impact on foreign demand for housing in London. Fourth, it remains to be seen how Brexit will impact on immigration flows which of course also impact on house prices. The first and third factor are missing from non-London areas apart from the ripple effects on the commuter belt, in particular. Furthermore, while a falling pound might stimulate foreign demand for London housing, it will also bring upward pressure on the interest rate, at least temporarily, which would indicate a more subtle difference in the factors impacting on house prices in London and outside. On top of this there are of course supply side effects but they are likely to be less important in the short run. So, in summary, there are both ripple effects, common effects, and differential trends. Until the outcome of the Brexit negotiations become clearer it is hard to say which factor will dominate but the negative impact of Brexit on house prices seem to be setting in as expected.

Global risks from rising debt and asset prices

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Question 2: Is the loose monetary policy of major central banks responsible for the recent increase in global leverage or asset values?

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Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
loose monetary policy surely has not helped but is just one of the factors behind it.

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Question 1: Does the world economy face heightened risks arising from an excess of public and private debt and/or inflated asset prices?

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Answer:
Agree
Confidence level:
Confident
Comment:
Large gross asset and liability positions are a risk especially since households and firms might have got used to a low interest rate environment.

Wages and economic recoveries

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Question 2: Do you agree that the different behaviour of UK real wages relative to Eurozone wages during the Great Recession is in large part due to the UK having different labour market policies?

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Answer:
Neither agree nor disagree
Confidence level:
Not confident
Comment:
The evidence for the UK indicates an increase in UK labor supply during the Great Recession probably due to reductions in household sector wealth (see.g. Blundell, Crawford and Jin, EJ, 2014). UK labor markets are also more flexible than they were 20 or 30 years ago which probably means a more pronounced drop in UK real wages in this recession. However, many European countries have also become more flexible over time (eg. Germany) so it is less clear how this should impact on the relative performance of the UK economy. Surprisingly, in the UK there is no evidence that the drop in real wages derive from compositional changes.

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