House Prices and the UK economy

Saturday, November 25, 2017

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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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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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Make sure to save each question separately

Summary

A majority of leading economists think that the phenomenon of declining prices in the London property market will ripple out to the rest of the UK, according to the latest Centre for Macroeconomics and CEPR survey. Asked whether a widespread weakening of the housing market will slow GDP growth significantly, the experts are more divided: roughly a half agree and roughly a third disagree. Several point to uncertainty about the eventual Brexit outcome making it very difficult to engage in predictions about house prices and growth; others suggest that lower house prices could be a good thing for the UK economy, especially young people.

Background

Before the UK’s 2016 referendum on membership of the European Union (EU), the International Monetary Fund (IMF) forecast that a vote to leave would be likely to lead to ‘sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance.’

After the Brexit vote in June 2016, the UK economy seemed to have avoided the predicted real estate slowdown. According to the Nationwide Building Society’s House Price Index, annual UK house price growth was 4.5% in January 2017, slightly higher than the 4.4% annual house price inflation in January 2016 before the referendum.

But in recent months, there appears to have been a more marked slowdown in the growth of house prices. The same Nationwide index now indicates that UK house prices grew by only 2% in year to September 2017, having dropped steadily since March 2017.

More surprisingly, the usually buoyant London market is leading this recent trend of a cooling property market. The Economist discussed the relative slowdown across London price brackets. For the first time since 2005, London is the weakest performing region in the UK with house prices having fallen by 0.6% in the third quarter of 2017 (July-September) and up only 1.2% on a year earlier. The East Midlands is the fastest growing region with house price inflation of 5.1% in the third quarter.

London, nonetheless, remains the most expensive region in the UK. The average house in London costs £471,761 compared with £177,825 in the East Midlands and £127,213 in the North of England. The most recent falls would need to accelerate and persist for many quarters to close these gaps.

The importance of the housing market in the UK is further seen in measures taken in the Budget 2017 announcements on 22 November 2017:

First, to help young people to purchase a home, the government abolished stamp duty for first-time buyers up to a house price value of £300,000. Specifically targeting the London market, if the property costs up to £500,000, then first-time buyers will pay no stamp duty on the first £300,000.

Second, the Chancellor announced a £44 billion plan, in the form of direct government investment, guarantees and loans, which with planning reforms aims to increase housing supply.

The latest CFM-CEPR expert survey explores two aspects of recent developments in UK house prices:

First, we consider what respondents think is behind the recent developments considering, for example, potential roles for a delayed effect of Brexit and higher interest rates.

Second, we ask about the likely effects on the UK economy of a continued cooling of the housing market.

Developments in UK regional house prices

One view is that the slowdown in London house prices is a sign of likely future developments in the rest of the UK. Such a view stresses signs of cooling in the housing market. For example, mortgage approvals fell to 66,232 in September (a three-month low). Housing transactions decreased by 1.8% between August 2017 and September 2017.

The September 2017 RICS survey’s main indicators on demand and sales ‘both slipped deeper into negative territory, with this subdued picture anticipated to persist over the coming months.’ The RICS survey results also suggest that London is the weakest of the UK regions but is certainly not alone in experiencing a slowing housing market. And to the extent that the Bank of England’s November increase in interest rates is the start of a gradual normalisation of interest rates, higher mortgage costs will contribute to lower demand in the whole country.

On the other hand, some of these signs of housing market weakness are less pronounced than had been expected previously. For example, the September mortgage approvals outturn was slightly above the mean of a Reuters’ poll of economists. And the Bank of England’s November Inflation Report concluded on the housing market that ‘the outlook is more resilient than in August.’

There are also reasons for thinking that there are London-specific factors at work. For example, London may be more affected by Brexit concerns, was potentially already over-valued and is more affected by higher stamp duty on second homes than other regions.

The first question in the CFM-CEPR survey asked for views about the current outlook for the UK housing market.

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?

Forty-four panel members answered this question. Overall, the panel members agree with the statement; 47% either agree or strongly agree (54% weighted by self-reported confidence); 23% either disagree or strongly disagree; and around 20% neither agree nor disagree.

Sean Holly (University of Cambridge) strongly agrees and cites his own research (Holly et al, 2011) showing that ‘a ripple effect emanates from London, and in time spreads out to other regions.’

Ethan Ilzetzki (London School of Economics, LSE) also cites his own research (Cloyne et al, 2017) to point out the channel of the likely spillover from a slowdown in London house prices. His results indicate that ‘a £1 decline in housing prices leads to a 20p decline in borrowing’, and that the decline in borrowing would weaken consumption demand by Londoners. This leads him to conclude that ‘house prices in the rest of the country are bound to suffer as well.’

Ray Barrell (Brunel University) is one of a number of panel members who point to the combined effect of moderating demand and, potentially, expanding supply. ‘Housing supply might rise. Housing demand growth will moderate, in part because the reality of the costs of exiting the EU will begin to be felt.’ He emphasises the effect of reduced EU migration on demand, and points out that this is likely to affect the regions around London but less so elsewhere.

Sir Christopher Pissarides (LSE) agrees that the effects will be greatest in London but does ‘not see any reason why the rest of the country would be immune to that’.

Jonathan Portes (Kings College London) thinks that the outcome of the Brexit negotiations will be key to the behaviour of house prices across the UK. ‘The central scenario remains sluggish growth, both in the economy and for house prices. But the prospect of a “chaotic Brexit” could make matters considerably worse.’

Strongly disagreeing, Patrick Minford (Cardiff University) points to ‘good signs of steady upward movement now outside London’ and emphasises London-specific factors driving behaviour there. Richard Portes (London Business School) and David Smith (Sunday Times) both think that non-London regions will experience less growth rather than falls in prices.

Martin Ellison (University of Oxford) explores the relationship using the Nationwide index. His analysis suggests that, if anything, house prices in the non-London regions are a better predictor of the behaviour of London house prices than vice versa. Acknowledging the importance of the Brexit outcome, he nonetheless notes that that ‘the -5.1% fall in London house prices seen in the immediate aftermath of Black Wednesday 1992Q4 failed to ripple out in any meaningful way.’

A number of panel members feel that the uncertainty is too great at the moment (and possibly in general) to engage in predictions about what will happen. They neither agree nor disagree with the statement. This group includes Panicos Demetriades (University of Leicester), Morten Ravn (University College London, UCL) and Ricardo Reis (LSE).

Some respondents see desirability in a fall in house prices. Dame Kate Barker (British Coal Staff Superannuation Scheme) actually sees falls in regional house prices as possible, but thinks that the declines in regions outside London would be driven by different factors than the ones affecting London house prices and hence it would not be a rippling out.

Two panel members think the focus on house price growth is itself wrong. Andrew Mountford (Royal Holloway, University of London) points to ‘the damaging structural role that housing plays in the UK economy’ through reduced social mobility, threats to financial stability and investment that is distorted toward housing.

David Miles (Imperial College London) points out that small, often transitory, house price oscillations should not attract the attention they do. He notes that ‘newspapers get very excited by even the smallest fall and start writing about meltdown coming across the UK and then within a few months are writing stories about London being on fire again.’

The macroeconomic effects of weaker housing markets

The Bank of England’s November 2017 Inflation Report states that: ‘Housing investment growth overall is projected to be fairly subdued in coming quarters.’ Historically, there is a high correlation in the UK between consumption growth and house price inflation. This suggests that weakness in the housing market is likely to reduce household consumption, as well as having a direct effect on investment.

A weaker housing market may also exacerbate already weak productivity through increased mismatch. Households that are unable to sell a property may potentially be unable to switch employment and move to a better job match without a long commute.

International evidence, however, suggests that the effects of house price depreciations are not so simple. For example, Mian et al (2015) find asymmetric effects in the United States of large and moderate house price depreciations. Aizenman et al (2016) examine a panel of countries and find a positive effect of large house price depreciations on economic growth.

As such, a significantly weaker UK housing market, especially when led by reductions in the price of property in London, may actually boost GDP growth. For example, Caballero et al (2008) show that falling house prices may force low-productivity firms out of the market, which would further free up bank credit to lend to productive firms. And with less mortgage lending activity, credit may be reallocated toward the commercial and industrial sectors.

More affordable housing may also make it easier for younger workers who are currently renting to move into areas with high-productivity jobs. Furthermore, a major house price correction may redistribute wealth toward the young, thereby helping to address intergenerational inequality.

The second question in the CFM-CEPR survey asked for opinions on the effects of a weaker housing market on UK growth:

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

Forty-three panel members answered this question. 44% either agree or strongly agree (53% weighted by self-reported confidence), 35% (33%) either disagree or strongly disagree, and 19% (14%) that neither agree nor disagree.

Costas Milas (University of Liverpool) notes that ‘Both in 1990 and in 2008, a big drop in real house prices preceded recessions.’ Some members point to a likely wealth effect. Roger Farmer (University of Warwick and the National Institute of Economic and Social Research) says that ‘Housing wealth is over half of all UK wealth and, if house price growth falls or reverses, there will be a significant feedback effect on to measured growth.’

John Muellbauer (Nuffield College, University of Oxford) emphasises the short-run negative consequences of house prices through weaker aggregate consumption given that the ‘collateral effect on spending in the UK of housing wealth and the buffer stock role of home equity, given easy refinancing of mortgages, is substantial.’ But he also stresses some factors indicating that the home-equity channel is likely to be weaker than it was in the early 2000s: young people are increasingly unlikely to have a mortgage, higher proportions of mortgages are at fixed rates, mortgage credit is more restricted now and retirees are ‘fairly insensitive to variations in owner-occupied housing wealth.’

Ray Barrell (Brunel University London) worries that ‘weak house prices may reduce entrepreneurial activity and business investment, as many small ventures are initially financed on the back of loans secured on residential property.’ Ricardo Reis and Thorsten Beck (Cass Business School) point to the effects on the construction sector.

Sylvester Eijffinger (CentER, Tilburg University) agrees with the statement and worries that the relationship will be stronger than typically because it is accompanied by the uncertainty surrounding the Brexit negotiations.

Wouter den Haan (LSE) disagrees but also worries that, potentially, ‘combined with Brexit uncertainty, falling house prices may negatively affect confidence substantially and then effects could be bigger.’

Many panel members point out problems of looking at correlations between economic activity and house prices. Jan Eeckhout (UCL) believes that ‘the causality from GDP growth to housing (and not in the other direction) seems dominant.’ John Van Reenen (MIT Sloan) similarly argues that a Brexit-induced decline in real incomes will cause ‘both a fall in consumption and house prices (relative to trend).’

Michael Wickens (Cardiff Business School and University of York) additionally notes that an ‘attempt to increase the supply of housing would “weaken” the housing market but would generate output and not slow output growth.’

Disagreeing with the statement, some members think that the effects will be muted and so disagree with the statement’s use of ‘significantly’. Richard Dennis (University of Glasgow) expects ‘weakness in the housing sector to damp GDP growth somewhat’. But he notes that ‘if house prices were to fall bringing about a steep decline in residential investment, then that would be a different story.’

Some respondents – for example Andrew Mountford, Dame Kate Barker and Gianluca Benigno (LSE) – think that lower house prices would be a good thing for the UK economy and especially young people. John Muellbauer also emphasises how ‘a switch from taxation on transactions (stamp duty) to taxation of property values’, together with housing supply expansion, could ‘increase rates of family formation and reduce the outmigration of talented Brits seeking a better life outside the UK.’

How the experts responded

Developments in UK Regional House Prices

Participant	Answer	Confidence level	Comment
Richard Portes London Business School and CEPR	Disagree	Not confident	Not ‘declining’ outside London, but not rising significantly over the next couple of years.
Albert Marcet Institut d’Analisi Economica, CSIC	Agree	Confident	All these house price booms and busts tend to ripple out from the central parts of metropolitan areas to the less central parts. It is harder to know how strongly it will affect other regions which did not experience the huge growth of London real estate. I would guess it will affect eventually those regions as well.
Akos Valentinyi University of Manchester	Neither agree nor disagree	Confident
Martin Ellison University of Oxford	Disagree	Confident	Historically there’s not much evidence that house price developments in London lead those in the rest of the country. Calculations with quarterly Nationwide data from 1973-2017 show that house prices in the regions are slightly at predicting future London house prices than London prices are at predicting future house prices in the regions. The elephant in the room is Brexit and whether London is first in the queue to feel the effects, although the -5.1% fall in London house prices seen in the immediate aftermath of Black Wednesday 1992Q4 failed to ripple out in any meaningful way.
John Muellbauer Nuffield College, University of Oxford	Agree	Very confident	Regions close to London, such as the South East, are likely to follow the softening trend in London house prices, but to a smaller degree. Regions further away are much less likely to follow as they have not yet caught up with the previous outperformance of London prices, especially those regions distant from London. One can expect London to do worst. In addition to the extraordinary house price/earnings ratios, the additions to supply and the move of financial and other business services to EU locations following Brexit, London tends to be the first destination for immigrants. London is experiencing a large net outflow of regional migrants to other UK destinations because it is so relatively expensive. These are less likely to be replaced by immigrants from the EU than before, so the net effect is likely to be quite negative for London house prices.
Michael Wickens Cardiff Business School & University of York	Neither agree nor disagree	Not confident	Declining London house prices is almost certainly due to Brexit, both the movement of people back to the continent and the negative effect of Brexit on the economy of London. The effect on the regions is less clear. Apart from the South East, which will be similar to London, they will be much less affected by either the movement of labour or any decline in the regional economies. The regions will probably see an increase in house prices relative to the South East and London.
Morten Ravn University College London	Neither agree nor disagree	Confident	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.
David Smith Sunday Times	Disagree	Very confident	Though in past cycles falling house prices have rippled out from London to the rest of the country, there have been special factors behind the weakness of house prices in the capital recently, including the impact of stamp duty. I would expect to see house prices flattening nationally but would be surprised if there is a significant fall
Michèle Tertilt Universität Mannheim	Disagree	Confident
Wouter Den Haan London School of Economics	Agree	Not confident at all	Predicting what is going to happen with house prices is very difficult. But with growth slowing down and the BoE beginning to start raising interest rates because of inflation it seems likely that house prices will stop increasing an falling prices seem more likely than increasing prices. I would be surprised though if they would fall a lot.
Andrew Mountford Royal Holloway	Neither agree nor disagree	Confident	You have a rare talent for choosing an important topic and then focusing on its least important aspect. The key issue about UK house prices is not whether they will rise or fall by a few percent in the next few months but the damaging structural role that housing plays in the UK economy. The housing market is (i) inhibiting social mobility - (transferring resources from the working poor to the more prospereous, with home ownership increasingly affordable only to those with family backing i.e. wealth), (ii) threatening financial stability (as UK domestic bank business models are still heaviliy reliant on mortgage lending (which is about two thirds of major UK banks’ loans to UK borrowers)) and (iii) distorting UK investment as the dependence of UK domestic banks' balance sheets on UK housing makes them an asset that cannot be allowed to crash for systemic reasons (which therefore increases its desirability). This together with suboptimal supply - due to the collapse in public sector house building over recent decades- and excess demand from its role as an international safe long term asset, means UK house prices are significantly too high. The UK housing sector is seriously distorted and is a drag on UK growth. http://www.bankofengland.co.uk/publications/Pages/fsr/2017/jun.aspx
David Cobham Heriot Watt University	Agree	Confident	There are certainly some London-specific factors, but not enough to swamp or to nullify the ripple effect.
Sean Holly Cambridge University	Strongly agree	Very confident	There is some empirical evidence in Holly, Pesaran and Yamagata (2011) - at least up to the start of the great recession - that a ripple effect emanates from London, and in time spreads out to other regions. We found also that bubbles in London house prices are associated with a prior boom in New York house prices, presumably because of closely connected financial markets. However, more recently the boom in London house prices has been affected also by Chinese and Russian buyers as well as New York. Holly, S., M. Hashem Pesaran and Takashi Yamagata (2011),"The Spatial and Temporal Diffusion of House Prices in the UK”. Journal of Urban Economics, 69, 1, 2-23.
Jonathan Portes KIng's College, London	Agree	Confident	Yes; house prices are likely to be subdued nationally. But a lot depends on wider economic developments, which in turn depends on Brexit. The central scenario remains sluggish growth, both in the economy and for house prices. But the prospect of a "chaotic Brexit" could make matters considerably worse.
Richard Dennis University of Glasgow	Agree	Confident
Ray Barrell Brunel University London	Agree	Very confident	We should expect more moderate real house price growth in the UK over the next decade than we have seen over the last decade. Housing supply might rise. Housing demand growth will moderate, in part because the reality of the costs of exiting the EU will begin to be felt. House prices in the UK have been strong in recent years in part because population has been rising whilst housing supply has not. Migration has been one factor behind increased demand, and we will see it decline on exit from the EU. The impact on migration and on housing markets will be greatest in London and the South East as financial services incomes and employment contract noticeably. It is not surprising that we are already seeing house prices fall in London and the South East, and we can expect that they will fall relative to those outside the area. It is not very likely that prices will fall significantly elsewhere.
Jim Malley University of Glasgow	Agree	Confident
Ricardo Reis London School of Economics	Neither agree nor disagree	Not confident	Predicting house prices (or any other asset price) is close to being a fool's errand. Moreover, the UK's economic prospects have so much uncertainty around them as a result of Brexit, that it is very hard to make any forecasts for the state of the economy or the housing market in particular. Finally, the budget for next year can have a significant impact on house prices depending on what the promised reforms of the UK housing market turn out to be. Given all of these, I find it hard to make a prediction with any certainty on what will happen to house prices.
Michael McMahon University of Oxford	Disagree	Confident	The London market is experiencing some idiosyncratic developments. While these could ripple out to a few near-neighbouring areas. However, these are unlikely to be the cause of declines in other parts of the country. Instead, other developments such as a widespread macroeconomic slowdown, or a tightening of credit conditions, would likely cause the more widespread slowdown in the UK housing market.
Paul De Grauwe London School of Economics	Neither agree nor disagree	Not confident
Sir Christopher... London School of Economics	Agree	Confident	London is traditionally a leader in house price movements. I believe the cooling off is due to uncertainty about the Brexit deal and I do not see any reason why the rest of the country would be immune to that - although I also think that Brexit will have a bigger impact on the London economy than elsewhere
Patrick Minford Cardiff Business School	Strongly disagree	Very confident	There are good signs of steady upward movement now outside London. London has been exceptionally strong until the recent correction. This seems to be a specific London correction, due to the stamp duty rate and also fears about a Corbyn attack on non-doms plus high taxes.
Robert Kollmann Université Libre de Bruxelles	Neither agree nor disagree	Confident
Fabien Postel-Vinay University College London	Agree	Confident
Roger Farmer University of Warwick	Agree	Not confident	Although I see some chance of this happening, there are too many factors on both sides of the equation to have much confidence in that prediction.
Panicos Demetriades University of Leicester	Neither agree nor disagree	Confident	Brexit will affect house prices unevenly. London will certainly be most affected as financial institutions and European institutions such as the European Banking authority start relocating elsewhere. This can be mitigated by people from commuting towns starting to find London more affordable and moving back in, which may lead to a ripple effect of falling house prices around London. With all the uncertainty around Brexit it’s hard to tell how the rest of the UK regions will be affected by Brexit. Those that are dependent on FDI related to EU membership and European investment will certainly experience a negative impact. The rest of the UK will experience declines in line with declining employment and GDP, but all this is highly uncertain and depends on the kind of Brexit deal that is agreed.
Jonathan Temple University of Bristol	Agree	Confident
Jan Eeckhout University College London	Agree	Confident
Costas Milas University of Liverpool	Agree	Confident
Sylvester Eijffinger CentER, Tilburg University	Agree	Very confident	The declining house prices are accelerated by the perspective of Brexit and will lead to falling house prices in more UK regions, especially those regions that are affected mostly by Brexit.
Kevin Hjortshøj... NYU Abu Dhabi	No opinion	Confident
Fabio Canova BI Norwegian School of Management	Disagree	Confident	leading indicators break down over time. east midland may be the next economic pole after brexit
Kate Barker British Coal Staff Superannuation Scheme and University Superannuation Scheme	Neither agree nor disagree	Confident	As income growth remains weak, the rate of new home supply in England has picked up. There has been the first move up in interest rates. This all suggests slightly weaker demand at present prices, and so outside London prices may weaken, rising slowly or even falling a little in nominal terms. however, the reasons for this will be a little different from those driving London house price declines at the moment (which include the impacts of stamp duty changes) so I would not describe this as 'rippling out'. And a sharp shock from higher interest rates or a move into recession with rising unemployment seems unlikely, so I am not anticipating a change in economic conditions of the type which would prompt a large change in house price expectaions and thus a damaging sharp fall in house prices. A slow move down relative to incomes, especially young people's incomes, is in any case quite desirable.
Evi Pappa European University institute	Neither agree nor disagree	Confident	It is very hard to form an opinion on the question asked given the level of uncertainty in the UK economy, anything can go.
Gianluca Benigno London School of Economics	Neither agree nor disagree	Confident	it is hard to say since that are idiosyncratic factors in local housing markets. London's house price have been cooling down especially in prime locations where Brexit uncertainties might play a bigger role. In any case a slowing down in house price increases is a welcomed development that might contribute to the rebalancing of the economy.
Ethan Ilzetzki London School of Economics	Agree	Confident	London is the central hub of the UK economy and a slowdown in London is likely to spill over to other parts of the country. In research we have conducted on the UK housing market (Cloyne, Huber, Ilzetzki, and Kleven, 2017), we find that a £1 decline in housing prices leads to a 20p decline in borrowing. From US-based research (e.g. Mian and Sufi) it appears that consumption declines follow the decline in borrowing. With weakening London consumption, house prices in the rest of the country are bound to suffer as well.
David Miles Imperial College	Disagree	Confident	The recent decline in average London house prices is very small and may well prove to be transitory. We have been here several times before in recent years - newspapers get very excited by even the smallest fall and start writing about meltdown coming across the UK and then within a few months are writing stories about London being on fire again. Its an asset price.....it should be hard to predict.
Alan Sutherland University of St. Andrews	Agree	Confident
Paolo Surico London Business School	Disagree	Not confident
John VanReenen London School of Economics	Agree	Confident
Thorsten Beck Cass Business School	Agree	Very confident
Gino A. Gancia Queen Mary University of London	Disagree	Not confident
Tim Besley London School of Economics	No opinion	Not confident
Lucio Sarno Cambridge University	Agree	Confident

The Macroeconomic Effects of Weaker Housing Markets

Participant	Answer	Confidence level	Comment
Richard Portes London Business School and CEPR	Strongly disagree	Confident	‘Weakening’ might be consequence of expansion of supply, which would overall be expansionary. In any case, stabilization or even some fall (not a large fall) in house prices not likely to have ‘significant ‘ negative effect on aggregate GDP growth.
Martin Ellison University of Oxford	Disagree	Confident	There’s some evidence in the Nationwide house price data that GDP growth leads house price growth in the UK (rather than vice versa) so in aggregate there’s no particular reason to believe that house price falls cause UK growth to falter.
Albert Marcet Institut d’Analisi Economica, CSIC	Agree	Very confident
Akos Valentinyi University of Manchester	Agree	Confident
John Muellbauer Nuffield College, University of Oxford	Agree	Very confident	In the short run, a more widespread weakening of the housing market will have negative effects on aggregate consumption, but with important distributional consequences, though the effect partly depends on the nature of the shocks behind this weakening. The collateral effect on spending in the UK of housing wealth and the buffer stock role of home equity, given easy refinancing of mortgages, is substantial. However, high house prices, more restricted access to mortgages in recent years, high levels of student debt and lower real earnings for younger cohorts have restricted the proportion especially of younger households with a mortgage. Spending by most retired households is fairly insensitive to variations in owner-occupied housing wealth. Therefore the pool of households for whom the home-equity channel is likely to be important is smaller than it was, for example, in the early 2000s. I would expect this channel therefore to be weaker currently than it was then, particularly as access to mortgage credit is rather more cautiously regulated now than it was then and with larger spreads for high loan-to-value loans. For evidence on the time variation of the aggregate home-equity channel in the UK, see Aron et al (2012)https://ideas.repec.org/a/bla/revinw/v58y2012i3p397-423.html. The fact that currently higher proportions of mortgages are at fixed rates, albeit for relatively short durations, may also be a small impediment to refinancing and so tend to reduce the size of the home-equity channel. Offsetting the home equity channel is the 'saving for a down-payment' effect whereby high house prices to income, particularly when access to credit is more restricted, discourage spending, particularly by younger households. Moreover, to the extent that private sector tenants may link current house prices with expectations of future rents, there is another negative effect on spending for part of the population of households. In my work with economists at the Bundesbank and Banque de France, summarised in Hendry and Muellbauer (2017) https://ideas.repec.org/p/oxf/wpaper/832.html we find that in these economies such negative effects tend to dominate aggregate consumption, though undoubtedly with a great deal of heterogeneity across households. In the longer run, lower house prices could support more sustainable growth, particularly if partly caused by a large supply expansion and accompanied by a switch from taxation on transactions (Stamp Duty) to taxation of property values: the combination would greatly improve labour mobility and productivity, while residential investment could be a major contributor to economic growth. Reducing the despair of many younger people priced out of decent housing should increase rates of family formation and reduce the outmigration of talented Brits seeking a better life outside the UK. Aggregate GDP growth in the longer run would be supported by such policies.
Michael Wickens Cardiff Business School & University of York	Agree	Confident	Would but not necessarily will. The attempt to increase the supply of housing would "weaken" the housing market but would generate output and not slow output growth. One problem with interpreting correlations between the two is reverse causation: slower growth would weaken housing demand. A big unknown factor in housing is monetary policy. If the Bank continues to raise interest rates (as it should) then this will weaken the housing market. This is all to be set against the background of an excess demand for housing in much, but not all, of the country which will make the housing market strong for some time to come.
Morten Ravn University College London	Neither agree nor disagree	Confident	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.
David Smith Sunday Times	Agree	Very confident	Housing transactions are clearly related to consumer spending and lower housing transactions will mean weaker economic growth. The RICS surveys, from the chartered surveyors, show a picture of weak demand and weak supply in the second-hand market. Both are reflecting a similar phenomenon: falling real wages and consumer worries about the outlook, including the outlook for employment. They are part of the same picture, in which we should expect a lower consumer contribution to UK economic growth.
Michèle Tertilt Universität Mannheim	Agree	Very confident	This is an ill-posed question. I think that due to Brexit most likely house prices and GDP will grow more slowly. Yet, I don't think that the causality runs from house prices to GDP growth.
Wouter Den Haan London School of Economics	Disagree	Not confident at all	Since I don't expect house prices to drop a lot if they will fall, I also do not expect a big impact on the UK economy. But combined with Brexit uncertainty, falling house prices may negatively affect confidence substantially and then effects could be bigger. But I do not see this as a major risk factor.
Andrew Mountford Royal Holloway	Strongly disagree	Confident	No the UK economy would be much better off if house prices were significantly lowered. It would improve social mobility and investment efficiency. This is not to say that the process could not be mismanaged and so cause reduced investment and a banking crisis but this does not need to happen. Measures to reduce house prices should be taken in a policy coordinated way that ensures that the banking system remains stable and maintains overall investment during the process of house price adjustment. Much could be achieved via the tax system by increasing taxes on housing speculators (empty house tax), and on home ownership (i.e. an income tax on the imputed income from the rental value of home ownership), together with a large public sector building program where purchased land is valued at current use ( so that land speculators do not profit from this public investment -see recent Guardian article) . However it is difficult to see this happening in the short to medium term due to the widespread belief that this is politically impossible due to the voting behaviour of homeowners and the lobbying power of speculators. However in the longer run as the percentage of property owners in the voting public declines then this necessary large structural change will become more conceivable. https://www.theguardian.com/money/blog/2017/nov/18/house-prices-land-prices-cheaper-homes
David Cobham Heriot Watt University	Agree	Confident	I agree with the statement for the short term. But if this weakening was part of a wider rebalancing of the UK economy (which I doubt will occur), then there could be some positive effects on growth in the longer term.
Sean Holly Cambridge University	Disagree	Confident
Jonathan Portes KIng's College, London	Agree	Confident	In the short term, yes, although the direction of causality is primarily the other way - slowing GDP growth leading to lower house prices. In the longer term, lhowever, lower house prices, especially if driven by increased supply, would be good for labour mobility, wealth inequality and so on, and would hence be positive for productivity and GDP growth.
Richard Dennis University of Glasgow	Disagree	Not confident	I expect weakness in the housing sector to damp GDP growth somewhat, but I don't expect the effect to be "significant". If house prices were to fall bringing about a steep decline in residential investment, then that would be a different story.
Ray Barrell Brunel University London	Strongly agree	Extremely confident	A more widespread weakening of the UK housing market would slow consumption growth and hence reduce GDP growth. The initial slowdown could itself be evidence of anticipated slower GDP growth, but it would still feed-back and reduce consumption. The effects could be significant in the short term if the anticipated fall in house prices is fully taken on board by consumers, but it is more likely to be a continual drag on growth as the negative implications for incomes of exit from the EU slowly become clear. In addition, weak house prices may reduce entrepreneurial activity and business investment, as many small ventures are initially financed on the back of loans secured on residential property. Housing wealth affects consumption for the same reasons that government debt is part of wealth, as Barrell and Weale (2010) discuss. Barrell et.al. (2015) present evidence of the relative impacts of financial and housing wealth on consumption in the UK, and show that housing wealth has larger and more significant effects on consumption. These effects can be noticeable, as we have seen in the last three housing cycles in the UK over the last 30 years. The impact of the use of residential property as collateral on investment behaviour is discussed in Bahaj et al (2017). They suggest that house price falls could noticeably and negatively affect investment growth in the UK. Bahaj, S., Foulis, A., and Pinter, G., (2017) ‘Home Values and Firm Behaviour’ Bank of England, mimeo Barrell, R., Costantini, M., and Meco, I., (2015) ‘Housing wealth, Financial wealth, and Consumption: new evidence for Italy and the UK’ International Review of Financial Analysis vol.42 pp.316-23 Barrell, R. and Weale, M. (2010) 'Fiscal policy, fairness between generations, and national saving'. Oxford Review of Economic Policy, 26 (1). pp. 38 – 47
Jim Malley University of Glasgow	Disagree	Confident
Ricardo Reis London School of Economics	Agree	Not confident	The negative impact on the construction sector, which is quite leveraged and already in bad shape according to stock market valuations, and the reduction in consumption would likely lead to a slowdown in GDP growth in the short run.
Michael McMahon University of Oxford	Agree	Confident
Paul De Grauwe London School of Economics	Neither agree nor disagree	Not confident
Sir Christopher... London School of Economics	Agree	Confident	It is difficult to say whether the slowing down of house prices will cause a slowdown in GDP growth. I believe it is more likely that the same causes of the weakening of the housing market will cause a slowdown of GDP growth. If house prices actually fall they will contribute further to the slowdown
Patrick Minford Cardiff Business School	Strongly disagree	Confident	Yes, there is some connection between the housing market and consumption but this is because both are driven by business cycle income effects; housing spending has a high income elasticity and so is highly correlated with consumption. Currently the UK is experiencing a steady business cycle expansion whose demand direction is being shifted by the Brexit devaluation of some 15%, away from consumption towards net exports, profits and business investment.
Robert Kollmann Université Libre de Bruxelles	Neither agree nor disagree	Confident
Fabien Postel-Vinay University College London	Disagree	Confident
Roger Farmer University of Warwick	Agree	Confident	Over the medium to long term, wealth is a significant driver of employment and changes in employment are an important driver of changes in real GDP. Housing wealth is over half of all UK wealth and, if house price growth falls or reverses, there will be a significant feedback effect on to measured growth.
Panicos Demetriades University of Leicester	Disagree	Confident	London prices reflect its importance as a financial centre. That has to some extent distorted everything else. With London property prices becoming normalised, younger workers will find it more affordable to move back in and that will certainly have positive effects on productivity in other sectors.
Jonathan Temple University of Bristol	Neither agree nor disagree	Not confident
Jan Eeckhout University College London	Agree	Not confident	It is possible, but the causality from GDP growth to housing (and not in the other direction) seems dominant.
Costas Milas University of Liverpool	Agree	Confident	Both in 1990 and in 2008, a big drop in real house prices preceded recessions. Real house prices inflation turned negative in 1989q4 (and stayed negative) well before the GDP recession in 1991q1. On the other hand, real house price inflation turned negative in 2008q1 just two quarters before (the subsequent) GDP recession. So if history were to repeat itself, a widespread slowdown in house prices will hit GDP growth quite significantly. For what is worth, I discuss and provide a historical plot of real house price growth and GDP growth at: https://news.liverpool.ac.uk/2014/06/27/viewpoint-housing-market-threat-and-bank-of-englands-response/
Sylvester Eijffinger CentER, Tilburg University	Agree	Very confident	The more widespread weakening of the UK housing market will certainly slow UK GPD growth significantly because it is accompanied by the uncertainty about the financial and trade relations with the European continent caused by the Brexit negotiations and the unclear British positions.
Kevin Hjortshøj... NYU Abu Dhabi	No opinion	Confident
Fabio Canova BI Norwegian School of Management	Neither agree nor disagree	Confident	don't see a direct connect between house prices and gdp growth, especally if economic activity moves away form london
Kate Barker British Coal Staff Superannuation Scheme and University Superannuation Scheme	Strongly disagree	Confident	The modest weakening which I expect would not have more than a very modest impact on GDP in the short-term, and long-term might be mildly positive.
Evi Pappa European University institute	Disagree	Confident	The slow down of UK GDP growth would be driven by many factors, I do not think that the UK housing market is a cause but I think its a consequence of those other factors driving the economy growth down.
Gianluca Benigno London School of Economics	Disagree	Confident	as I wrote earlier the economy before the brexit vote needed a rebalancing from consumption towards productive investment and exports.. A correction in house price and a depreciation of the currency are good in this sense.
Ethan Ilzetzki London School of Economics	Agree	Very confident	My own research and related research in the US indicates that housing price declines have impacts for the economy as a whole. In research we have conducted on the UK housing market (Cloyne, Huber, Ilzetzki, and Kleven, 2017), we find that a £1 decline in housing prices leads to a 20p decline in borrowing. From US-based research (e.g. Mian and Sufi) it appears that consumption declines follow the decline in borrowing.
David Miles Imperial College	Disagree	Confident	I suspect the direction of any effect is, net, negative i.e. a weakening housing market (falling house prices) probably does mean weaker spending and growth. I disagree with the word "significantly". A limited but widespread weakening of house prices - say falls of up to 5% - would probably not dent spending and GDP "significantly". In contrast meaningful rises in mortgage interest rates are quite a different (and more powerful) thing.
Alan Sutherland University of St. Andrews	Neither agree nor disagree	Confident
Paolo Surico London Business School	Disagree	Confident
John VanReenen London School of Economics	Agree	Not confident	The main point is that Brexit will cause a fall in real incomes relative to remaining in the EU. This will cause both a fall in consumption and house prices (relative to trend). The problem is not house prices per se, but the underlying structural causes. Brexit will lead to lower trade, FDI and immigration dampening growth. London and South East have high house prices because of a lack of supply (due mainly to poor planning regulations).
Thorsten Beck Cass Business School	Agree	Very confident	It will affect consumption but also construction sector
Gino A. Gancia Queen Mary University of London	Neither agree nor disagree	Not confident
Lucio Sarno Cambridge University	Neither agree nor disagree	Not confident

How the experts responded

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