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Professor Geraint Johnes
Professor of Economics at Lancaster University
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Professor Geraint Johnes

The UK's spatial housing market bubbles

Authors: Professor Geraint Johnes

28 March 2014

The Bank of England’s Financial Policy Committee has sounded a warning about conditions in the housing market. It notes a rise in mortgage approvals of some 40% over the last year, and a record level of mortgages for which the loan is more than four times the borrower’s annual income. This warning reflects more widespread concern about the emergence of a housing market bubble.

The latest data on house prices do indeed show a rapid acceleration, with average house prices across the country growing by some 6.8% over the year January (with the Bank’s data suggesting a further sharp rise since). But this figure conceals some very substantial variations across the regions. In London, house prices are growing at a rate of 13.2%, surely unsustainable. In the South East, the increase is 7.1%. In other regions the rate of growth is much more modest – in the North East, house prices have grown by just 0.6%, and in Scotland by just 1.4%.

Regional unemployment disparities remain wide, with rates varying from 5.2% in the South East to 9.5% in the North East. Moreover, while unemployment is falling quite rapidly in the South East, the latest data record a rise in the North West, Yorkshire and Humberside, the East of England, and the East Midlands.

The latest available data on regional growth rates of gross value added – though somewhat out of date - likewise indicate a very uneven recovery. These show the South East growing at 2.5%, but most other regions growing at less than 1% per year, and with the East Midlands actually contracting.

In sum, these data indicate a considerable measure of spatial disparity. Recovery is proceeding apace in the South East, but has barely begun in some other regions. Past experience suggests that the improvement in the state of the economy will transmit across regions eventually – though it appears to be doing so more slowly this time than it has done in the past.

The extent of the disparities at this juncture is, however, a little worrying. The boom in the South East needs to be checked, but without stalling growth elsewhere. Monetary tools represent the mainstay of macroeconomic stabilisation policy, but a hike in the interest rate could not check growth in one region without causing profound damage in others. Different conditions across space call for policies that have different impacts across space. The solution to the South East housing bubble is not, therefore, to be found in macroeconomic policies – rather it is to address the supply side constraints. That means, quite simply, building more homes.