Will retailers benefit from a stronger housing market? I ask because house price inflation is on the rise. Reports from the RICS and Lloyds Banking next week are likely to confirm this; the ONS reported a similar thing last week.
Transactions, however, tell a different story. Bank of England figures next week are likely to show that although mortgage approvals have risen recently, they are still almost half what they were at their peak in 2003.
Which poses a question, which matters more for consumer spending: prices or transactions?
Theory tells us it should be transactions. This is because, for many, rising house prices are a liability. Sure, they make you better off if you are thinking of trading down or releasing equity. But if you are hoping to trade up, or to buy for the first time, higher prices make you worse off. And to the extent that higher house prices mean higher rents, they also squeeze the disposable incomes of all non-owners. It was for this reason that Willem Buiter, former chief economist at Citigroup, has argued that housing is not net wealth.
We think that higher inflation for consumer goods is a bad thing. So why shouldn’t the same be true of house price inflation?
Increased housing transactions, on the other hand, should raise consumer spending. This is because when we move house we spend more on housing-related items such as furniture, carpets, kitchens and DIY goods. Also, there’s a framing effect; having spent hundreds of thousands on a house, we regard a few hundred pounds as a trivial sum and so are likely to loosen the purse strings generally.
All this suggests that a pick-up in house price inflation, if accompanied by little change in transactions, will do little to boost consumer spending. That's bad for anybody holding retail stocks or hoping for a rise in interest rates.
But is it actually true? Here, we run into problems. One is that in the past fluctuations in house prices have been correlated with transactions. Another is that even if there were no causal link at all between the housing market and consumer spending we’d expect to see them rise and fall together simply because both are driven by income expectations – if we anticipate better times some of us will spend more in the shops while others buy a house. These problems make it difficult to disentangle the effect on spending of transactions and house prices.
We do, however, have a couple of clues here. In 2003 and in 2014 mortgage approvals fell significantly while prices rose. Both occasions saw strong growth in retail sales volumes. These episodes suggest that theory might not be exactly right. Perhaps rising prices do have some impact on spending.
And there’s a reason for this. Higher house prices allow borrowers to put up more collateral and hence to borrow more. Although, of course, few people take advantage of this, enough do so to give a small lift to aggregate spending.
Which gives us a reason to be slightly optimistic for retailers, as it suggests that higher house prices could have a mildly stimulative effect on spending.
But only slightly and mildly. With housing still so expensive in much of the country, and wages likely to grow only slowly, it is doubtful that house prices can rise very much.
