Economic Significance of Housing

It is obvious that housing is important for the economy, although not all the ways in which it is important are necessarily so obvious, and there are significant differences in relative importance between different countries. The housing construction sector is quite important; housing con- struction/investment as a whole may range between 2.5 % and 13.5 % of GDP[1], with similar shares of employment. The share of the economy is higher in countries with higher demographic and urban growth, such as Australia (6.4 %) or Ireland (8.4 %), than in countries with relatively low growth and output (UK, 3.3 %). However, it may be more volatile in some of the former group—Ireland’s share dropped from 14 % to 2.6 % between 2006 and 2011, as discussed further in Chap. 7. A broader definition of the construction and related property/real estate sectors would account for a somewhat higher share of GDP In countries such as the UK, which have tended to have lower rates of growth and new construction, there may be quite a high level of expenditure on refurbishment, conversion/extension, and so on (Calcutt 2007; Ball 1996).

Whilst being a substantial sector in the economy may mean that housing construction/development has a significant voice in the government policy arena, this does vary from country to country, partly reflecting the above variations in size. So, for example, we would observe the housebuilding and development industry having more lobbying power in Australia or Ireland than in the UK. Also, as we argue in a later chapter, having significant lobbying power does not necessarily mean that the policies and measures lobbied for are in the best long-term (sustainable) interests of either housing producers or consumers.

Housing is ‘capital intensive’ and involves investment in ‘fixed assets’ which tend to have a very long life and fixed location. Many consequences flow from these characteristics, including the tendency of the sector towards cyclical booms and slumps, the importance of credit and debt and the evolution of distinct tenure forms. Housing contrasts with other economic sectors like manufacturing in being to a large degree tied to a domestic (indeed, a local/regional market)—there is relatively little international trade in ‘houses’, although building materials and some prefabrication systems may be traded. However, demand for housing, particularly as an investment, may be internationally mobile, and there has been growing concern with international investment in residential real estate, particularly in globally significant cities. Housing markets and development prospects will strongly reflect the way regional economies are growing (or declining). How far the quantity, price and quality of housing affects regional economic performance is a moot point, but some would argue that the economic performance of high-demand/housing-constrained regions (London and South East England, Edinburgh in Scotland, Sydney in Australia) may be hampered by inadequate housing supply (Tewdwr-Jones 2012; Buck et al. 2005; Barker 2004).

The interaction of the housing sector with the performance of the macro-economy has attracted increasing attention over the last two decades. As home ownership expanded and mortgage lending became more flexible (particularly from the 1980s), homeowners increasingly used their housing equity as a line of credit to support consumption spending as well as house purchase and improvement. This complicated macro-economic management, because it was found that national savings ratios could change rather unpredictably, exacerbating booms and slumps. Housing, like other forms of real estate is prone to speculative booms and busts, as discussed further, and these may be exacerbated by lax lending standards or the development of ‘subprime’ lending and a regime of reduced or no regulation. The wider macro-economy may be further damaged if excessive indebtedness and poor lending practice undermine confidence in the banking sector, as happened in a number of countries during the Global Financial Crisis (GFC) (particularly the period 2007-10). Whilst it may be argued that underlying economic imbalances between major economies and trading blocs lay behind these problems, the interaction of housing markets and banking systems led to a disturbing and costly ‘meltdown’ and an extended period of very slow recovery, as banks were recapitalised and states imposed austerity programmes to bring their own debt burdens under control.

This experience has not only underlined the economic significance of housing but also pointed to its problematic character. For the countries where housing construction represented the largest share of the economy in the 2000s, such as Spain and Ireland, the crisis and its aftermath have been most traumatic in terms of the fall in incomes and employment, high levels of unemployment and emigration (discussed further in Chap. 7 with particular reference to Ireland). For the UK, housing construction halved, but this represented a smaller share of the economy. However, one feature of the recovery phase in the UK has been the resilience of price levels and the willingness of the government to take measures to boost housing demand, even to the point of seeing prices rise quite strongly in London, in order to promote a positive ‘feel good’ factor in the wider economy and encourage consumption expenditure backed by housing equity. For some commentators, this betrays an unhealthy relationship between housing, the economy and politics (Chakrabortty 2016; Elliott and Atkinson 2012; Hutton 2011).

  • [1] Comparing Sweden and Norway, over the period 1996—2011, from Wilcox and Perry (2014) UKHousing Review, Table 8, derived from OECD Factbook 2009: Economic, Environmental andSocial Statistics and from National Accounts, OECD StatExtracts.
 
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