A summary measure for UK households’ resilience

Vania Esady and Stephen Burgess

A summary measure for UK households’ resilience

High levels of household debt have been shown to amplify recessions. For example, in the global financial crisis (GFC), UK households with more debt tended to cut back their spending disproportionately, amplifying aggregate demand effects and potentially making the recession worse. High levels of household (and corporate) debt can pose risks to the UK financial system through two main channels: lender resilience and borrower resilience. However, monitoring households’ resilience to future shocks is not an easy task. In this post we construct some new summary measures of borrower resilience. We show that increases in debt-servicing costs or in the flow of credit to households could make households less resilient overall.

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Flow of funds and the UK real economy

Laura Achiro, Gerry Gunner and Neha Bora

A flow of funds framework is a way of understanding and tracking the movement of financial assets between different sectors of the economy. This blog specifically analyses UK corporate and household sectoral flows from 2000 to the present and highlights how this framework can reveal useful trends and signals for policymakers about the real economy. For instance, the accumulation of debt in the pre-global financial crisis (GFC) era by households and corporates was a warning signal that indicated several potential risks and vulnerabilities in the economy, including overleveraging and asset price inflation.

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What’s been driving long-run house price growth in the UK?

David Miles and Victoria Monro

Since the mid-1980s, the average real (RPI-adjusted) UK house price has more than doubled, rising around one and a half times as fast as incomes. Economists’ diagnoses of the root cause varies – from anaemic supply, to the consequences of financial deregulation, or even a bubble. In our recent paper, we explore the role of the long-run decline in the real risk-free rate in driving up house prices. Low interest rates push up asset prices and reduce borrowing costs. We find the decline in the real risk-free rate can account for all of the rise in house prices relative to incomes.

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The ballad of the landlord and the loan

Mariana Gimpelewicz and Tom Stratton.

Who is living in private rental properties, and why? The buy-to-let market has been headline news recently. Typically the story has been profit-hungry landlords squeezing out first-time buyers. But landlords are only half of the story. This post examines the rental market from the perspective of tenants. Our work suggests demand for private rental properties cannot explain all of the growth pre-crisis, but the case for over-exuberance is inconclusive. We think that factors driving tenant demand, including demographics, social housing and credit availability, accounts for around half of the growth in the Private Rental Sector (PRS) pre-crisis and over 80% post-crisis. The most important driver post-crisis has been tighter credit conditions, which generated demand for an additional 1 million PRS properties. Looking ahead, we project that tenant demand will drive the PRS to swell by up to an additional 1 million properties between 2014 and 2019. If tenant demand were the only factor in play this would translate to annual growth in the number of buy-to-let mortgages of 2-7%.

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