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House Prices And Job Losses Via The Collateral Channel

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What explains the strong comovement between the housing market and the labour market in the UK? This blog summarises the findings of recent research by Pinter (2015) that emphasises the role of real estate as an important determinant of firms’ borrowing capacity. This is because real estate is widely used by corporates as collateral when trying to obtain external financing. Fluctuations in real estate prices may therefore cause fluctuations in firms’ borrowing capacity, which then affects firms’ decisions to undertake new investment, to create new jobs and to destroy existing jobs. The paper shows that this so-called collateral channel is important in understanding not only the recent Great Recession but historical UK business cycles in general


Given the increased importance of labour market variables in the recent policy debate in the UK (particularly the choice of the unemployment rate as a key component of the MPC’s forward guidance) as well as the increased financial stability concerns regarding house price dynamics, it is essential to better understand the drivers of the striking comovement between house prices and labour markets in the UK. The corporate collateral channel offers one possible narrative that can explain some fraction of this comovement. But this is not the only potential link between the housing and labour markets, and it would be interesting to explore alternative channels further. For example, with more detailed modelling of the household sector, and its balance sheet in particular, it would be possible to investigate the role played by channels operating through household debt and demand.

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