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House prices have risen substantially faster than the prices of consumer goods in most G7 countries over the past few decades.This raises major policy issues:such rises affect the distribution of wealth within and between generati...
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House prices have risen substantially faster than the prices of consumer goods in most G7 countries over the past few decades.This raises major policy issues:such rises affect the distribution of wealth within and between generations,the mobility of labour and financial stability.This paper explores why such rises have happened,and what the policy implications are.The price rises have been greatest in the United Kingdom,where real house prices have risen more than three and a half times since the 1970s,substantially outpacing real income growth.Meanwhile,rental yields have been trending downwards-particularly since the mid-9 Os.This paper reconciles these observations by analysing the contribution of a number of drivers of house prices.It shows that the rise in house prices relative to incomes between 1985 and 2018 in the United Kingdom can be more than accounted for by the substantial decline in real risk-free interest rates over the period.This is slightly offset by net increases in home-ownership costs from higher rates of tax.Changes in the risk-free real rate are likely to have been a major driver of changes in house prices.We analyse why they have driven house prices up faster in the United Kingdom than in other advanced economies.Our model predicts that a 1% sustained increase in index-linked gilt yields from current rates could ultimately result in a fall in real house prices of around 20%.
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This article reports estimates of the long-run costs and benefits of having banks fund more of their assets with loss-absorbing capital, or equity. We model how shifts in funding affect required rates of return and how costs are i...
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This article reports estimates of the long-run costs and benefits of having banks fund more of their assets with loss-absorbing capital, or equity. We model how shifts in funding affect required rates of return and how costs are influenced by the tax system. We draw a clear distinction between costs to individual institutions (private costs) and overall economic (or social) costs. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.
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In this paper we assess the recent history of house prices and of mortgage lending across Europe. We develop a simple economic framework to estimate the likely contributions of fundamental factors, such as changes in real incomes ...
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In this paper we assess the recent history of house prices and of mortgage lending across Europe. We develop a simple economic framework to estimate the likely contributions of fundamental factors, such as changes in real incomes and population growth, to house price appreciation. We also try to quantify how much of price rises might have been driven by rising expectations of future capital gains. We estimate that this might have played a significant role in several countries, including Spain, Sweden, Belgium, and the UK. We then consider what different types of mortgage arrangement might become attractive in a world of higher house prices, analysing types of indexed mortgage that have advantages where prices are higher relative to incomes and where house prices may be volatile and cannot be assumed to carry on rising.
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This article uses stochastic simulations on a calibrated model to assess the impact of different pension reform strategies where financial markets are less than perfect. We investigate the optimal split between funded and unfunded...
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This article uses stochastic simulations on a calibrated model to assess the impact of different pension reform strategies where financial markets are less than perfect. We investigate the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system when there are imperfections in financial markets. This article calculates the expected welfare of agents of different cohorts under various policy scenarios. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon preferences.
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The main aim of this paper is to analyse the impact of shifting demographics and changes in pension arrangements in a model that includes housing as both an investment asset and a consumption good. We consider the impact on welfar...
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The main aim of this paper is to analyse the impact of shifting demographics and changes in pension arrangements in a model that includes housing as both an investment asset and a consumption good. We consider the impact on welfare, and on macroeconomic aggregates, of some specific pension reforms. Using a calibrated OLG model with several sources of uncertainty, we find that the impact of ageing and of reform of social security upon the demand for housing and the level of owner occupation is substantial. We find that pension reform has a very significant impact on the demand for, and price of, housing. The interaction between pension reform and housing is a neglected subject and one which the results we present suggest is important.
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In this paper we perform simulations with a stylized model of the United Kingdom and Germany to show which generations might be gainer, and which losers, from a transition from an unfunded to a funded state pension system. We show...
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In this paper we perform simulations with a stylized model of the United Kingdom and Germany to show which generations might be gainer, and which losers, from a transition from an unfunded to a funded state pension system. We show that it is likely that more than one generation will be direct losers as a result of a transition (especially in Germany). If more than one generation are direct losers, then, in order for those generations not to be net losers, the chain of bequests (in the initial equilibrium) needs to satisfy a simple condition, which we derive and analyse.
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This paper explores ways in which volatility in the housing market that has damaging impacts on the financial system and the wider economy can be reduced. Alternatives to standard debt contracts to finance house purchase are consi...
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This paper explores ways in which volatility in the housing market that has damaging impacts on the financial system and the wider economy can be reduced. Alternatives to standard debt contracts to finance house purchase are considered. A form of equity loan, where repayments are linked to the value of the house, have major advantages in terms of risk reduction. The way in which such loans can be structured is analyzed.
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This article assesses the impact of Quantitative Easing and other unconventional monetary policies followed by central banks in the wake of the financial crisis that began in 2007. We consider the implications of theoretical model...
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This article assesses the impact of Quantitative Easing and other unconventional monetary policies followed by central banks in the wake of the financial crisis that began in 2007. We consider the implications of theoretical models for the effectiveness of asset purchases and look at the evidence from a range of empirical studies. We also provide an overview of the contributions of the other articles in this Feature.
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This paper assesses the case for the use of more explicit forward guidance on monetary policy in the UK. Such a policy was introduced in the middle of 2013. The economic conditions at that time meant that the rule adopted by the M...
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This paper assesses the case for the use of more explicit forward guidance on monetary policy in the UK. Such a policy was introduced in the middle of 2013. The economic conditions at that time meant that the rule adopted by the Monetary Policy of the Bank of England helped avert some risks to the emerging recovery.
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This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effect...
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This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households' choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
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