Macroeconomic/Financial Critique

Another line of critical argument considers the political economy of housing, and how it fits with the broader development of the macro-economy and the financial sector. There is an institutional strand to this, captured by the term ‘financialisation’, which refers to the growing importance of financial intermediary institutions and activities, the proliferation of financial ‘products’ and the concomitant increase in debt across society. There is also an international dimension, in terms of the large structural imbalances which have developed between countries like the USA and the UK, on the one hand, and China and other emerging economies on the other, with the former consuming more than they produce and experiencing a capital inflow as the latter group invests their surplus earnings in acquiring assets worldwide. There is a strand which relates to persistent weakness in the fundamental performance of the economy, reflected in low or negligible productivity growth, a deficiency of competitive tradeable sectors of industry and services, and a consequent chronic balance of payments deficit, which is a corollary of the (much more debated) public sector deficit. Politicians may mouth platitudes about addressing these issues, but what they actually do (because it is easier) is encourage a debt-financed consumption boom in which rising house prices play a key role. In this view, politicians’ commitments to improving housing affordability through increasing supply are disingenuous.

Under this scenario, the story of the run up to the GFC was of a Western financial system awash with money under low interest rates and increasingly reckless lending on real estate, driving a price boom which, whilst not necessarily a speculative bubble (in the UK at any rate) was clearly driven in part by ‘loose money’. A range of economic commentators would give some credence to this story, albeit also emphasising, in a number of cases, the complementary role of inelastic supply in the UK (Andre 2011; Meen 2011).

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