Bringing Household Finance Back In: House Prices and the Missing Macroeconomics of Comparative Political Economy

• Published date: 01 September 2024
• DOI: http://doi.org/10.1177/00323292231201480
• Author: James D. G. Wood,Engelbert Stockhammer
• Date: 01 September 2024
• Subject Matter: Articles

Bringing Household Finance

Back In: House Prices and the

Missing Macroeconomics of

Comparative Political

Economy

James D. G. Wood

University of Cambridge

Engelbert Stockhammer

King’s College London

Abstract

This article makes a key contribution to the comparative political economy literature

by accounting for the macroeconomic role of household f‌inance. Based on post-

Keynesian theories of f‌inance and the f‌inancialization literature, we place house prices

and mortgage credit squarely at the center of the macroeconomy, as speculative

house price cycles can facilitate homeowner consumption via the use of equity release

mortgages. Through an econometric evaluation of eighteen advanced economies from

1980 to 2019, we demonstrate that household debt is determined by house price

inf‌lation, and that rising household debt contributes to GDP growth, while business

debt has negative growth effects. These results are consistent across countries with

different growth models and f‌inancial systems. This suggests that the varieties of cap-

italism’s focus on corporate f‌inance is misplaced and that the growth models

approach needs a theory of house prices, mortgage credit, and f‌inancial cycles to ade-

quately conceptualize how debt-driven growth operates across advanced economies.

Keywords

comparative political economy, macroeconomics, house prices, mortgage, growth

models

Corresponding Author:

James D. G. Wood, University of Cambridge, Trinity Hall, Cambridge, CBW 1TJ, UK.

Email: jdw82@cam.ac.uk

Article

Politics & Society

2024, Vol. 52(3) 486–511

© The Author(s) 2023

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/00323292231201480

journals.sagepub.com/home/pas

In this article, we challenge the prevailing comparative political economy (CPE)

accounts of how the f‌inancial sector contributes to macroeconomic growth in advanced

economies, namely, the varieties of capitalism (VoC) approach and Baccaro and

Pontusson’s recent application of the growth model perspective to CPE.

1

The VoC

framework made a major contribution by linking differences in f‌inance and investment

across market typologies to forms of comparative institutional advantage, which stim-

ulates macroeconomic growth via national gains in competitiveness.

2

The VoC argue

f‌irms access investment capital either through corporate debt markets in liberal market

economies (LMEs) or via more traditional relationship-based banking in coordinated

market economies (CMEs). Therefore, the VoC approach emphasizes the importance

of corporate debt to support economic growth in varieties of advanced economies.

In contrast, Baccaro and Pontusson’s application of the growth model perspective to

CPE argues advanced economies are organized around specif‌ic demand-side growth

regimes driven by consumption, exports, or a combination of the two. As such,

Baccaro and Pontusson consider household debt a key mechanism to support growth

in what they describe as consumption-led economies characterized by stagnating

wages and rising inequality.

3

We contest that these CPE accounts do not suff‌iciently conceptualize the macroeco-

nomic role of the f‌inancial sector in advanced economies. Although business and con-

sumer credit are important channels of modern f‌inancial systems, mortgage provision

has been one of the principal drivers of growth in the f‌inancial sector, and most house-

hold debt takes the form of mortgage debt.

4

This is in part due to the substantial returns

on retail mortgage products that have seen bank lending largely reoriented away from

productive investment toward lending to households in the form of mortgage credit.

5

Furthermore, as spectacularly demonstrated by the 2008 global f‌inancial crisis (GFC),

house prices and household debt have been associated with cycles of boom and bust in

various countries, which have signif‌icant macroeconomic effects especially in terms of

f‌inancial instability.

6

However, the VoC’s focus on the f‌irm makes the framework inca-

pable of accounting for the household as an actor and the signif‌icant macroeconomic

effects of house prices and household debt.

7

While Baccaro and Pontusson do

acknowledge the links between house prices and household debt, they consider this

as an aside and essentially treat household debt as consumer credit. As such, they

fail to provide a systematic account of how house prices and household debt interact

to contribute to macroeconomic growth from a CPE perspective, which is where this

article makes its contribution.

Basedonpost-Keynesiantheoriesoff‌inance and the f‌inancializaton literature, we

propose placing house prices and mortgage credit squarely at the center of the macro-

economy. Specif‌ically, we contend that four key mechanisms (visually summarized

in Figure 1) explain the signif‌icant macroeconomic dynamics of house prices and

household debt. First, house prices are a key f‌inancial variable for the macroecon-

omy that may construct, and be determined by, speculative asset price cycles.

8

Second, as real estate is often considered a secure form of collateral for f‌inancial

institutions, house price increases will often induce bank lending to private house-

holds, driving mortgage debt growth.

9

Third, increases in mortgage debt, in conjunc-

tion with expectations of future house price increases, can reinforce house price

Wood and Stockhammer 487