Housing Market: 14.1 Significance of Housing

Over the last 25 years, housing has emerged as one of the key indicators of activity in the UK economy.

The high level of owner occupation places housing at the centre of attempts by policy makers to manage demand through the use of interest rates. However, its importance extends beyond this.

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A key indicator of UK activity

The pivotal position of housing in Britain is unique amongst European economies and is one of the factors highlighted by the Chancellor in his ‘Five Tests’ on the single currency to explain why the UK is different (and therefore why the one interest rate for euroland might not work for the UK). (See 14.8 Housing Market and the Euro.)

High levels of owner occupation

Owner-occupation was promoted by the Conservatives in the 1980s as a core element of their political and social policies. It accounts for 70% of households, having been less than 50% in 1979. Around 60% of owner occupiers have mortgages and the average outstanding mortgage nationally in mid-2009 was around £110,000. (See Housing Market 14.2 Industry Dynamics.)

Its role in monetary policy

In the 1960s, it was by varying taxes and credit restrictions on the purchases of cars that governments tried to encourage or constrain the consumer, but now attention has switched to housing. With the vast majority of outstanding home loans at variable rates of interest, changing base rates can act as an effective brake or accelerator on consumer spending.

The more recent trends towards rates fixed for a set period, however, will dampen the immediate impact of changes in interest rates. (See also Housing Market 14.5 Wealth Effect of Owner Occupation.)

Other areas of importance

The importance of housing to the economy extends beyond controlling demand.

  • For most individuals, housing is their major asset and their wealth is often measured in terms of the value of their house.
  • It can be used as security for borrowing, either by individuals to support spending or by small businesses.
  • The significant regional variations in house prices restrict the mobility of labour to the detriment of the economy as a whole.
  • Either as new building or repair and maintenance, housing accounts for over one third of all construction activity (about 2% of GDP).
  • Not least, housing is a very sensitive political issue in various ways, such as the provision of social housing for those not able to buy or in planning terms when authorities have to balance the claims of new housing developments against environmental considerations.