3 - Housing and macroeconomic instability

Summary

The first two chapters of this book asserted that differences between national housing systems – especially the degree to which they are penetrated by markets – play a key role in determining social, political and economic outcomes. The next three illustrate these linkages at work. This chapter examines the relationship between housing market configurations and macroeconomic instability, Chapter 4 assesses the connection between housing and inequality, and Chapter 5 focuses on how different housing outcomes feed into political affiliations and positions.

For the purposes of this discussion, macroeconomic instability broadly refers to greater extremes in the business cycle. In more volatile economies, periods of economic expansion result in higher highs – in terms of variables like income, consumption and employment. But these booms come with a cost – downturns that are more pronounced when an expansion comes to an end.

This chapter is organized around four “channels” through which we should expect commodification and financialization to affect an economy’s general level of instability: the leverage channel, the wealth channel, the credit diversion channel and the imbalances channel. The rest of this chapter is occupied with two main tasks. The first is to define each of these channels and how they (theoretically) connect macroeconomic volatility to housing financialization and commodification. The second goal is to assess the strength of these theorized links by examining the available data. The final section of the chapter concludes with some key takeaways.

The leverage channel

The leverage channel is a good starting point because it is arguably the best-known and most-explored of the links between housing prices, debt and macroeconomic volatility. Essentially, the more leveraged households become in order to buy their homes – that is, the more debt they owe relative to their incomes – the more vulnerable they are to negative economic shocks. To take the simplest of examples, consider the impact of a sudden job loss on a family with a €500 monthly mortgage payment versus a €1000 one (or versus a family with no mortgage at all). The family with the larger mortgage will be forced to reduce its spending more drastically – and is more likely to face losing its home altogether.