Key questions

• Why do house prices keep on rising, and is this good or bad for individuals and the wider economy?

• What determines whether individuals can get onto the housing ladder or whether they have to rent?

• What is the place of the construction and mortgage lending industry in the economy?

• How does housing contribute to financial crises and cycles of boom and bust?

Summary

For those lucky enough to afford one, a house is the most expensive thing they ever buy, and entails assuming the biggest debt they ever take on. Having got on the housing ladder, homeowners stand to gain from rising house prices. Tight planning laws and limits on credit push prices up still further. Governments rake in a lot of taxes from housing transactions and so encourage this situation to continue. The trouble is, housing forms a huge part of the stock of wealth of society, and periodic gyrations in the market therefore have a massive effect on the economy; the recent financial crisis had its origins in reckless mortgage lending, and central banks have often had to hike interest rates to choke off previous housing booms, triggering recessions. It is no wonder we keep seeing booms and busts with this crazy situation. This chapter examines housing and the impact it has on lifestyles and the wider economy itself.

Key theories and topics covered

Demand and supply of housing; housing as privatized welfare; planning laws and restrictions; housing and construction in the wider economy; new forms of homeownership.

Economics of the housing market

Housing has always been a critical part of the economy and is central to most people’s lives. It is not merely a place to live but also, for those who take the plunge and buy their own home, a massively important asset. Housing is probably the only major type of wealth holding that a majority of people have access to in their lives. It is easily the biggest thing they ever buy, entailing taking out the biggest loan they will ever manage, and, if all goes well, it can provide them with a significant asset that they can realize in their old age and possibly pass on to their children in the form of an inheritance.