House Prices and the UK Economy

What are the reasons behind the collapse in UK house prices and how did the housing ‘bubble’ emerge? This paper provides an introduction to the macroeconomics of housing in the UK and forecasts 3 potential scenarios for the future of housing market.

The financial crisis revealed the vulnerability of the UK housing market to economic shocks and the danger of assuming ever increasing house price rises. This paper analyses the drivers behind UK house prices and explains the reasons for the high levels of volatility in the sector. It reviews both supply and demand side drivers, including planning contraints, credit availability and securitization and the incentives created by the tax system. The drivers are analysed in a comparative perspective, contrasting the UK policy environment with international housing markets from Europe and the U.S.  The paper then goes to develop three scenarios for the future of UK house prices, assuming different levels of mortgage credit availability.