Here’s an economic question I don’t know the answer to

So, we’ve rising GDP. We’ve also rising house prices.

Some therefore say we’ve rising GDP because of the housing bubble.

But I don’t see how house prices influence GDP. For GDP is a measurement of a flow. It’s not a stock like the “wealth” in property. The influence of housing sales on GDP would be the increase in estate agent commissions, the redoing of the bathroom and all that. But even that would be a result of the turnover of houses, not particularly the price at which they are selling.

So where does this idea that GDP growth is being driven by a housing bubble come from?

What have I missed?

21 comments on “Here’s an economic question I don’t know the answer to

  1. I haven’t heard that theory but it’s provably not true. Growth of house prices is 3%, nowhere near enough to explain the growth in UK GDP..

    As you say the housing market is seen as an important driver of the economy as more builders, plasterers, painters, roofers etc will be employed, plus raw materials needed

  2. The rise in house prices enables homeowners to borrow more money that they have not yet earned to spend on goods and services. A vast percentage of that leaks out on the UK economy into imports of consumer goods and foreign holidays, but some is injected into the UK economy with a Keynesian multiplier.
    That is how, despite their incredible stupidity, New Labour managed to report growing GDP in the ten years 1997-2007 thanks to £1 trillion increase in household debt before the bust when banks cut back on the rate of increase in lending to people who could not actually afford to repay them.

  3. I think people believe wrongly that if house prices rise they are richer and so spend more money.
    Of course they are not richer as they still need somewhere to live and if they didn’t need somewhere to live they only have the money when they sell.

  4. More money being pumped into the economy, distributed via property sales and rents, etc. Initially manifests as increased GDP, then manfests as inflation, hence boom and bust.

    The bank won’t lend me a hundred grand to buy a supercar. But it’ll lend me 100 grand to buy a house; I buy the house, the seller gets the money and spends some of it into the economy. That kind of thing. It’s all indirect.

  5. Depends.
    Do you mean “in the figures”? Something you can point to & say “this here is as a direct result of house price rises?
    Probably not.
    But when house prices are rising, house owners have the illusion they’re getting wealthier.
    Notice this in the building game. When prices are rising, folk spend a lot on their houses.The cost of a new bathroom can be covered by the rise in price in the period it takes to get the job done. And,of course, the punter has the totally erroneous belief he’s also added to the value of the house. So he’s actually twice as better off because he hasn’t “really” spent any money. He’s “invested” it. And he rewards himself for his acute knowledge of the property market by buying himself a new car.
    When house prices are falling, he won’t pay to have the front door painted
    It is, of course that whole mindset the house you live in is an “investment”. Which it would be if the later intention was to sell it & live in a tent.
    That’s why my advice would be to regard your home like any other chattel. It’s a liability, not an asset. It’s worth what its benefit is to YOU. Not some imaginary buyer. Because if you ever came to wanting to sell it & move out of property ownership, odds on everyone else would be doing the same thing.
    See Spain & shudder.

  6. Incidentally. Being very much not an economist, thank heavens. Seems to me a large portion of that GDP, the creation of new wealth, just gets locked up in the increasing illusory value of property. Now tell me how it doesn’t.

  7. The people who compile the GDP stats have been told to just keep using a smaller and smaller GDP deflator each month until private sector borrowing picks back up?

  8. Howsoever preposterous DailyMailOnomics may be, it’s probably less preposterous that much of Macroeconomics.

  9. According to Goldman, Housing contributes to GDP growth in three ways: 1) the direct effect through residential investment; 2) the consumption impact through housing wealth and active mortgage equity withdrawal..; and 3) the multiplier effect through increases in housing-related employment and easing of bank lending standards in a stronger home price environment….

    http://www.zerohedge.com/news/2013-08-13/goldman-without-boost-housing-real-gdp-growth-would-fall-below-1-year

  10. People whose house “value” has substantially increased feel better off and thus are more willing to spend. It used to be that they actually could access more money because they could take out an increased mortgage on the increased “value” but perhaps banks are a bit leery of that now.

  11. I think the rise in house prices is largely limited to posh areas of London where champagne socialist journo’s live, who – the “recession” narrative having collapsed, are desperate for something, anything, with which to bash the Coalition.

  12. Who cares? GDP is a crap measurement anyway. If you pull someone off a dole queue and give her a job as a one legged lesbian tax collector you have increased GDP but most of us would think this not a useful way of getting the nation more into debt.

  13. Estate Agents’ commissions will be partly driven by turnover but also partly driven by house price levels given that they are based on %age.

  14. KJ

    Thanks for pointing us to the article.
    Having read it, I think the “direct effect through residential investment” means changing the housing stock in some way, building new (described as the most important component) extending etc. So – and this is opinion; not an answer – I would say the answer to tim’s question is no, house price increases do not show DIRECTLY in the measure of GDP.
    Of course much of the activty around it does contribute to the direct measure, e.g. estate agents fees. We should also remember that house price increases are both a symptom and indirect cause of GDP growth – the multiplier.

  15. Can’t GDP influence house prices, instead? Isn’t a housing bubble created by more demand, and isn’t that demand driven by more money being available?

  16. Imputed rent might form some of the answer. I think it is a notional figure based on what rental income homeowners could get.

  17. bloke in spain,

    I think you’re erroneously conflating the risk that prices can go back down with the idea that they never went up in the first place.

    > when house prices are rising, house owners have the illusion they’re getting wealthier.

    If I own something that was worth 100k five years ago and is now worth 120k, I am indeed wealthier, in that I have more valuable capital than I did. That’s not illusory. What’s illusory are the (admittedly popular) ideas that the increase is irreversible and the wealth is useful even when not realised.

    > The cost of a new bathroom can be covered by the rise in price in the period it takes to get the job done. And,of course, the punter has the totally erroneous belief he’s also added to the value of the house.

    Again, this belief isn’t erroneous. OK, so “value” is rather arguable, but, in this context, people mean price, or potential realisable price. And, if I buy a run-down shitheap previously inhabited by junkies and turn it into a structurally sound and prettily decorated house with a paradise of a garden, then yes, I have increased the price of the house — and I’ve probably increased its value by some other less concrete measures too.

    > It is, of course that whole mindset the house you live in is an “investment”. Which it would be if the later intention was to sell it & live in a tent. … if you ever came to wanting to sell it & move out of property ownership

    You appear to be completely discounting the possibility that someone might sell their house in order to buy a different house — trade in their one-bedroom flat for a three-bedroom semi, for instance. It’s odd to discount that possibility, when it is by far the most common scenario.

  18. @ Squander Two
    If you want to move out of a one-bedroom flat into a three-bedroom house after a period of general property-price inflation then you will be worse off as a result of the rise in prices. OAPs who choose to trade down to a one-bedroom flat after the kids have got married and left home would benefit but very few choose to do so: for instance, after my father died my mother lived alone in a five-bedroom house, more than twenty years after the last of her children had left.
    Secondly, everyone (except those super-rich who choose to live in a succession of luxury hotels) needs to own or rent somewhere to live so a change in the notional market price of your residence (whether owned or rented) does not change its value. It’s value is how good a place it is in which to live. Price is not value and the failing of the Russian language in that it only has one word to cover the two very different concepts of price and value may be a significant reason why they suffered Marxism for 70 years.

  19. Personal future production brought forward through equity release. I recall an old neighbour that remortgaged through the 90s and 00s to take advantage of the increase in value of the house. She still has to work now in her 70s.

    How often do people change cars, remodel bathrooms, change wardrobes now. I doubt very much whether all that consumption is funded by real money. No doubt someone will know where to look up the relevant figures regarding debt though.

    I recall unraveling knitted jumpers when I was a kid so they could be remade; we were of course desperately poor though but even so, times have changed and not necessarily for the better.

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