Medium-term cycles in affordability: what does the house price to income ratio indicate?

,David Gray

doi:10.3934/nar.2021010

Abstract

Using the Christiano-Fitzgerald filter to extract business and medium-term cycles, this paper considers house price, gross domestic product per head and the ratio of the two for the UK over 1955–2020. It shown that, although the synchronisation of business and medium-term cycles is associated with the largest price and ratio events, there a shift of volatility from the former to the latter cycle range, which begins in the 1980s. The medium-term cycles are closely aligned. Indeed, the phase-leading role of income over the others is at odds with current stabilisation policy thinking. The trend in income growth is steady but then, around 2002 peters into a stagnant period. The trend in the house price-income ratio is remarkably stable, but in the era of finance liberalisation, that stability is disrupted both in trend and cycle. This appears to be altered by the adjustment to greater financial accessibility. In effect, this trend traces the amount of debt that an agent's income is expected to service when purchasing a dwelling, or the real interest rate. Any return to the normal cost of capital could have a severe impact on borrowers.

Highlights

Medium-term cycles, those beyond with business cycles, have been neglected
Using the Christiano-Fitzgerald filter to extract business and medium-term cycles, this paper considers house price, gross domestic product per head and the ratio of the two for the UK over 1955–2020
The results suggests that there are medium-term and business cycles that occasionally conspire to cause large disruptive events in the economy

Summary

Introduction

Medium-term cycles, those beyond with business cycles, have been neglected. It is common to filter out the cycles beyond the business range and ascribe them to the trend. Comin & Gertler (2006) posit that medium-frequency oscillations may be intimately related to business cycles and that business cycles may be a more persistent phenomena than conventional measures suggest. Borio (2014) argues that financial cycles are found among medium frequencies, which, through property, would affect business cycles.Leamer (2007, 2015) argues that housing cycles are business cycles [in the US]. Leamer sees property finance for purchase or building has longer cycles over which there are booms and busts, with corresponding regulatory scrutiny. An implication of these two positions is that cycles could be found in both the business and medium-term ranges, reflecting both real and financial economies in both incomes and housing. Their interaction is both formal through a ratio of housing affordability, and through their mutual determination and dependence on income

Objectives

Methods

Results

Conclusion