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.
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.
I agree for reasons broadly on the grounds set out by Barro and Gordon. Given the deep problems of the Eurozone, with populist pressures for a break-up increasing, subjecting the ECB to even greater pressures from particular governments, is unlikely to lead to good outcomes. That said, better co-ordination between the most powerful government – Germany, the European Commission and the ECB to try to defuse these break-up pressures will be needed. A strong ECB voice that reflects the broader welfare of the countries in the monetary union need not detract from its independence.
Given the ECB’s limited mandate, which is unfortunately unlikely to change, I do not see much change in independence of the ECB. Assuming policy remains accommodative in the new international environment, inflation should rise towards the target. However, there are different counterfactuals, and the answer would then depend very much on the nature of the reduction in central bank independence. For example, if the ban on monetary finance of the fiscal authorities were removed, this might change the long term inflation outlook. But if an independent ECB remained the guardian of when such monetary finance were offered, I see little reason why worries about inflation should increase.
The election of Donald Trump and the dramatic shift in US fiscal policy expected in 2017 have changed the situation. ECB monetary policy had become largely ineffective (except for some periphery economies) as argued in http://voxeu.org/article/helicopter-money-and-fiscal-rules.
The exchange rate channel and the US aggregate demand-spill-over channel should boost growth in Europe, though with some offset from higher commodity prices. However, inflation will rise. The steeper yield curve should help bank profitability. This removes two of the problems Eurozone monetary policy had faced. Central bank ineffectiveness in meeting its inflation target (or indeed in supporting aggregate demand) does not destroy central bank independence. After all, the ECB could (quietly) admit to the national governments that it had done what it could, given its mandate, and that it was now their turn to step up to the plate. However, the new international environment does reduce its embarrassment.
The CFM surveys informs the public about the views held by prominent economists based in Europe on important macroeconomic and public policy questions. Some surveys focus specifically on the UK economy (as the CFM is a UK research centre), but surveys can in principle focus on any macroeconomic question for any region. The surveys shed light on the extent to which there is agreement or disagreement among these experts. An important motivation for the survey is to give a more comprehensive overview of the beliefs held by economists and in particular to include the views of those economists whose opinions are not frequently heard in public debates.
Questions mainly focus on macroeconomic and public policy topics. Although there are some questions that focus specifically on the UK economy, the setup of the survey is much broader and considers questions related to other countries/regions and also considers questions not tied to a specific economy.
The surveys are done in collaboration with the Centre for Economic Policy Research (CEPR).
House Prices and the UK economy
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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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?
The Future of Central Bank Independence
Question 3: More generally, do you agree that it is desirable to maintain central bank independence? Again focus on the near future, say next 48 months.
Question 2: Do you agree that the traditional argument that less central bank independence leads to higher inflation will (still) be relevant over the next 48 months in Western economies?
Question 1: Do you agree that central bank independence in the Eurozone and the UK will decline over the next 48 months?