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 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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Question 1: Do you agree that lower real wage growth was beneficial for employment levels during the Great Recession?

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Answer:
Neither agree nor disagree
Confidence level:
Extremely confident
Comment:
What matters is (a) real wages RELATIVE to productivity, and (b) real wage flexibility. Real wage growth may be high but not obstructing employment growth if productivity growth is high. If the question is meant to be whether low real wage growth relative to productivity is good for employment, I would agree under normal circumstances. Wages is the single largest component of marginal costs for most firms. High real wages relative to productivity make firms uncompetitive, has a negative impact on hiring, and makes it difficult for new workers to enter the labour market. The other way of asking the question, is whether wage flexibility is beneficial for employment. In normal times, wage flexibility should be expected to be stabilizing. To the extend that the value of jobs has declined in the recession, low real wage growth therefore should be expected to have been beneficial for employment. It is possible, however, that in deep recessions, the impact of wage flexibility on demand for goods may introduce an amplification mechanism that may dominate. This will depend crucially on whether wages of existing or new jobs are more flexible and the extent to which workers are insured against the adverse effects of job loss.

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