I will go on to look at why, post-pandemic, the market might be very different to the post-GFC period and some of the broader implications were house prices to resume their pre-GFC trend of rising significantly above earnings. Finally I will look, at what, if any, implications this might have for policy. 1  Countries included in this calculation are: Australia, Belgium, Canada, Switzerland, Germany, Denmark, Spain, Finland, France, United Kingdom, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Netherlands, Norway, New Zealand, Sweden, United States. The authors acknowledge use of the dataset described in Mack, A., and E. Martínez-García. 2011. "A Cross-Country Quarterly Database of Real House Prices: A Methodological Note." Globalization and Monetary Policy Institute Working Paper No. 99, Federal Reserve Bank of Dallas. 2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  The post financial crisis period. In the 30 years following the liberalisation of the financial sector in the 1980s, outside recessionary periods, house prices in the UK grew consistently faster than earnings. There were two periods of particularly fast growth in house prices relative to incomes. The first was in the late 1980s, ahead of the early 1990s bust, and was driven by that liberalisation. The second was from the late 1990s up until the global financial crisis, and may have been linked to the Bank of England’s independence in 1997 and the consequent reduction in interest rates as inflation expectations and risk premia fell.
Tripathy et al, “Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK” show that constrained banks issued fewer high LTI mortgages after the FPC’s policy was introduced. They also find evidence supporting the macroprudential benefits of the policy. The local areas with greater exposure to constrained lenders experienced smaller declines in house prices in the aftermath of the EU referendum in June 2016, when house prices fell across most UK regions. 15  11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  The distinction between expectations effects and credit constraints matters in another way. To the extent that demand for housing is simply subdued by dampened household expectations about the future, there is no ‘loss’ to households. If however, demand for housing is held back by credit constraints, transactions which are desired are ‘lost’. One needs to be careful however about assuming that relaxation of credit constraints will lead to all otherwise ‘lost’ transactions taking place. The thought experiment I carried out earlier suggested that almost 10 million additional transactions would have occurred from 2007 to 2020 had transactions remained at their-pre financial crisis level. But this assumed that house prices remained at the actual levels we saw over the period. In the absence of increased supply, the evidence suggests that much of the additional demand would have fed into higher prices, raising indebtedness in the short term but eventually choking off the additional demand.