4 Housing Markets, One Country

The Eurozone has become a very extreme example of the dangers inherent of creating a single currency area populated with a myriad of different countries and regions. There is little doubt that the right monetary policy for Germany is not necessarily the correct one for Portugal given the underlying structural differences and lack of fiscal coordination.

However, closer to home, there could be an argument that the same (albeit in a less extreme form) is true of the UK. Looking through the prism of the UK housing market over the past 30 years, it’s possible to argue that there are 4 distinct regional markets within the UK. The UK is not an optimal currency area.

Using historical regional data from the Halifax house price index (see the chart below), there have been some very large and identifiable variations between different regions within the UK. Prices within Greater London have fared the best over the period, showing a strong bounce back from recent lows. Northern Ireland has suffered from an extreme boom and bust whereas the Scottish market has been the relative underperformer over the same period. In contrast, the other regions of the UK have, by and large, moved in lock step with each other.

Given the fact that Bank Rate is the same in Chelsea & Kensington as it is in Dundee, the potential to exacerbate structural imbalances between regions due to a common monetary policy is clear to see. Indeed there is a sense that as central London market prices rise to new highs in absolute and relative terms, we are witnessing a new liquidity fuelled bubble divorced from the economic fundamentals of the rest of the UK.

However, there are mitigating factors: existing within a single sovereign political entity, fiscal transfers and labour force mobility should all help redress these imbalances over time. The fact the London and the South East contribute a greater proportion in tax revenue is a case in point. However, due to the foibles of negative equity, labour mobility has been greatly constrained in recent years. Differences in regional unemployment bear witness to this fact. For example, the latest ONS data states that the unemployment rate in the North East is 12.0% compared to 6.4% in the South East.

Are we therefore condemned to a future of further economic stresses and strains within the UK? Maybe not. If the Scottish do eventually decide to leave the United Kingdom with their own central bank and currency, maybe the Northern Irish and Londoners should be given the same option too?

Discuss Article

  1. Paul Amery says:

    Another very interesting piece – thank you

    Posted on: 16/02/12 | 12:41 pm
  2. Rufus Gilday says:

    That last sentence about the Banks of Scotland, Ulster and London is the  stuff of political nightmares. 
    Missing in the emerging debate on Scotland is how a small “country”with a supine property market, managed to develop two banks which blew up the UK banking system. The canny Mr Salmond seems to think they can keep the oil and we can keep the banks, We should send him homewards ta think again

    Posted on: 16/02/12 | 12:43 pm
    • longodds says:

      You describe the Scottish retail property market as ” supine”. The facts are that for more than a decade house prices in Scotland have been growing at well above their historical long term trend and that in the 5 years to the beginning of 2007 , when house prices everywhere started to slow down, prices in the Highlands and Islands area rose by more than 100%.

      Your viewpoint nicely illustrates why Alex Salmond’s call for independence is beginning to appeal to a wider audience in Scotland. You, from what I would guess is a South of the border perspective look at the chart and see ” a supine” Scottish market in other words less opportunity for using a house as a financial asset from which you hope to make a large capital profit. North of the border a significant number of people look at the same chart and wonder how young people will ever be able to afford their own home (just to live in not as a profit centre) and look at the other lines on the chart and think ” more fool them” The Conservative party have never understood that difference in outlook and never will so as both Salmond and Cameron have recently alluded to there will, for the foreseeable future , be more pandas than Conservative MPs in Scotland.

      Those who are greedy and selfish by nature almost always look at relative performance figures and see faults with the “poorest performer”. The reality generally is that the highest performers have been in the biggest bubble and have the furthest to fall and the most pain to suffer once reversion to the mean, or more more basically common sense prevails. My guess is that there is some 20 years or so of pain to come as the unwinding continues. As there were people in Scotland who bought towards the end of the bubble we, with our supine property market, will suffer but not to the same extent as those who regard above trend growth and capital values doubling in 5 years as not good enough – they will have much more to worry about.

      Your jibe about Scottish banks blowing up the UK banking system is little more than ill informed mud slinging. No doubt you remember that Barclays were in a head to head with RBS to buy ABN Amro and were only saved from that fate by being outbid by the ego of Fred. He unfortunately visibly self inflated as his largely London based advsers and the London based media goaded him onwards with headlines such as “London is being pitted against Edinburgh” and profiles such as
      ” The Biggest Hitters in British Banking” which of course listed him and his “attributes”.

      For the record I used the same upside down ( some would say Scottish) viewpoint about how one should use relative performance figures to help identify that RBS shares were much too high and sold somewhere North of 550p and I was short of the housing market as early as 2007. I am a house owner lucky enough to now have substantial equty in my now mortgage free property but I hope house prices continue their decline because I have no wish to prosper any further at the expense of the younger generation. And no I have never voted for the Scottish National Party – yet.

      Posted on: 17/02/12 | 12:14 pm
  3. John McDermott says:

    Surely, the larger trend is global urbanisation?  Over half the world’s population now live in urban areas.  In 2005, megacities accounted for 9% of the global population (certainly more by now).
    http://spectrum.ieee.org/computing/hardware/megacities-by-the-numbers
    These cities are more productive and more innovative that smaller populations, and will continue to attract populations.
    Although London is not in the list quoted above, I suspect this is a geo-political artefact, as the greater travel-to-work area would seem to put in the same category as the others listed.
    I suspect that tax or public policy can’t buck the trend.

    Posted on: 16/02/12 | 7:17 pm

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