Ian Stewart

Economists disagree on lots of things, but on one thing at least there is a consensus. Productivity, or the efficiency of production, is the main driver of human welfare. The data bear this out. Consider that growth in living standards in the UK since the late nineteenth century has been driven entirely by rising productivity. It is not surprising that improving productivity is the Holy Grail of economic policy. This is why the stagnation in productivity growth since the financial crisis represents such a challenge. Stagnating productivity means stagnating living standards and public services. To some such outcomes calls into question the legitimacy of the economic system.

Financial crises tend to see asset prices collapsing, making housing more affordable. But it’s been different this time because the authorities in the UK, and elsewhere, countered the crisis with low interest rates and quantitative easing. By slashing the cost of borrowing and flooding the system with liquidity, these policies set out to - and succeeded in - inflating asset prices. So we have seen the UK stock market and housing market rising at roughly the same amount in the last ten years. Taken together with weak wage growth, the result is that housing in the UK (as in many other countries) has become less affordable. So what has been the result of these post-crash policies? How overvalued is UK housing - and how does it compare to house prices elsewhere?