On the aggregate housing market implications of labour market change

Given the important changes that have taken place in labour markets in the UK in recent years, it would be surprising if there were no knock-on effects to housing markets. Even basic microeconomic models of household behaviour indicate that labour supply, consumers' expenditure, housing demand and household financial asset accumulation are all simultaneously determined. It is with the interactions between markets that this paper is concerned and, in particular, how the interrelationships may have changed during the nineties. Our focus means that special attention has to be paid to the issue of aggregation. Aggregation would not be a problem if i) all agents had the same housing demand functions or ii) if incomes (and other regressors) changed at the same rate for all individuals and over all spatial units. In fact, neither is the case. In literature suggests that the income distribution in this country has changed considerably since the late seventies. Both violate standard aggregation conditions so that aggregation from micro models of household behaviour to aggregate models of housing demand is not straightforward. Although the labour market changes that have taken place since the early eighties were microeconomic in orientation, they also had aggregate labour market effects in terms of changes in the wage share and the distribution of personal income between wage and investment income. Since the income elasticity of housing demand is expected to vary between individuals, income source and location, standard aggregation conditions predict that changes in the stochastic trends determining incomes will influence aggregate housing demand. More precisely we expect that aggregate housing demand will be lower than in the seventies and eithties as a result of changes in the labour market. Our empirical results support this finding. The weakness of housing demand and house prices during the nineties is consistent with changes in labour markets. If our interpretation is correct (and the sample is still short), then the fall in demand is permanent unless labour market conditions are reversed.