Global Finance, Labor Politics, and the Political Economy of Housing Prices

• Published date: 01 September 2017
• DOI: 10.1177/0032329217702102
• Author: Aidan Regan,Alison Johnston
• Date: 01 September 2017
• Subject Matter: Articles

https://doi.org/10.1177/0032329217702102

Politics & Society

2017, Vol. 45(3) 327 –358

© 2017 SAGE Publications

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DOI: 10.1177/0032329217702102

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Article

Global Finance, Labor

Politics, and the Political

Economy of Housing Prices

Alison Johnston

Oregon State University

Aidan Regan

University College Dublin

Abstract

International political economy identifies declining nominal interest rates, securitization,

and financial liberalization as drivers of rising housing prices. Despite witnessing these

common credit shocks, however, developed economies experienced divergent

trends in housing inflation since the 1980s. We offer a comparative political economy

explanation of variation in house prices, arguing that by restraining household incomes,

wage-setting institutions can blunt financial liberalization’s inflationary impact on housing

markets. Employing quantitative analysis and a comparative study of Ireland and the

Netherlands, we uncover two findings. First, countries where political coalitions in

the export sector held veto powers over those in the nontraded sector in national

wage setting realized lower housing inflation. Second, the impact of sectoral coalitions

on housing prices in OECD countries is similar to that of financial variables. Our

results suggest that the organization of labor politics continues to play an important

role in mitigating the destabilizing effects of global finance on developed economies.

Keywords

housing prices, labor politics, growth models, international political economy,

comparative political economy

Corresponding Author:

Alison Johnston, Department of Political Science, School of Public Policy, Oregon State University,

339 Bexell Hall, Corvallis, OR 97333, USA.

Email: Alison.Johnston@oregonstate.edu

702102PASXXX10.1177/0032329217702102Politics & SocietyJohnston and Regan

research-article2017

328 Politics & Society 45(3)

The US subprime mortgage crisis and subsequent 2008 global financial crisis demon-

strated the devastating effects of rapid housing inflation (and housing bubbles) on

national economies. In addition to their destabilizing economic effects,1 housing bub-

bles also have important political implications. Sudden declines in housing prices can

be deeply regressive if disproportionate shares of poor households store their wealth

in (subprime) mortgages.2 Likewise, Ansell3 has shown that rising or falling housing

prices impact individuals’ electoral preferences toward the welfare state.

International political economy (IPE) highlights a number of factors that led to

asset bubbles within OECD countries in the late 2000s: declines in nominal interest

rates, financial liberalization, the proliferation of cross-border capital flows, and

(mortgage) securitization.4 These developments also had important implications for

real estate, as they reduced the costs of (mortgage) borrowing for households and

increased the volume of debt instruments that banks could extend to households.

However, IPE accounts of global financial and credit market trends, which tend to

rely heavily on the US’s experience,5 fall short in explaining the variation in housing

prices within the OECD. Financial liberalization and reductions in nominal interest

rates impacted all developed economies since the 1970s. Despite this common credit

shock, there was a wide divergence in housing inflation across countries. Some

(Ireland and Spain) witnessed rapidly rising prices in the 1990s and the 2000s, while

others (Germany and Japan) witnessed average declines.6

We offer a novel political argument to explain variation in house prices across

developed economies. Shifting toward a comparative political economy (CPE) per-

spective, we suggest that the labor politics that govern income growth are a crucial

determinant of housing inflation. Our approach complements the recent call by

Baccaro and Pontusson7 to rethink the supply-side bias of CPE by bringing the politi-

cal determinants of aggregate demand back in. While (international) credit shocks are

important for the emergence of rapid housing inflation, we highlight that buoyant

housing price growth also requires the presence of income shocks, which are shaped

by domestic wage setting and labor politics.

We argue and empirically demonstrate that countries with labor market institutions

that allotted the export sector8 agenda-setting or veto powers in national wage setting

(what we call “export-led political coalitions”) over the nontraded sector (what we call

“domestic-led political coalitions”) realized moderated income growth, which miti-

gated households’ demand for mortgages and, in turn, housing inflation. In other

words, countries with labor market institutions coordinated by political coalitions in

the export sectors of the economy enabled a countercyclical incomes policy that tamed

the inflationary effects of cheap credit on housing markets.

Our analysis of the political determinants underlying housing prices makes three

important contributions to political science. First, it illustrates that labor politics con-

tinue to play an important role in mitigating the destabilizing effects of global financial

liberalization on developed economies. Second, our results suggest that the old corpo-

ratist debate on the relationship between wage setting and macroeconomic outcomes

is not dead, but has manifested itself in new ways with important implications for

(housing-driven) wealth inequality.9 Third, it reverses the causal arrow in current

political science literature that dissects the effects of housing prices on politics (namely,

Johnston and Regan 329

on individuals’ political preferences for the welfare state10), by detailing how politics

affect housing prices.

IPE and CPE Explanations of Housing Inflation: A Credit

Supply-Side Bias?

IPE literature identifies a link between financial liberalization and the loosening of

capital controls, and the presence of asset bubbles.11 Increased international capital

flows, and new “innovative” financial products, such as (mortgage-backed) securities

(MBSs), gave governments and households a greater capacity to borrow due to higher

credit volume. Moreover, the harmonization of financial market rules among devel-

oped countries reduced regulatory uncertainty among foreign lenders, providing fur-

ther incentives for lenders to increase credit supply.12

Increased capital mobility in developed economies also aligned with reductions in

nominal interest rates, which made credit cheaper. Since the late 1970s, the removal

of capital controls and reduced exchange rate volatility that accompanied the transition

to a low inflation regime produced lower nominal interest rates. These developments

were magnified in Western Europe for countries that participated in the European

Monetary System (EMS) and joined the EU’s Economic and Monetary Union in 1999.

Under the EMS, various Western European countries committed themselves to a fixed

exchange rate regime, which prompted them to initiate difficult wage and price adjust-

ments in order achieve exchange rate convergence.13 These adjustments (and the

removal of capital controls) reduced exchange rate risk, while the Euro eliminated it

completely, enabling lower nominal interest rates in EMU countries that previously

had high borrowing costs (notably Greece, Italy, Portugal, and Spain). Abundant credit

and declining borrowing costs established an environment conducive toward increased

private and public borrowing, which, through cross-national capital flows, became

intimately connected to securitization originating in the United States.14

The IPE literature alerts us to a constellation of factors that would fuel housing

inflation from the 1980s onward. Cheaper and more abundant credit, coupled with

MBSs’ reduction of default risk exposure, allowed banks to increase mortgage supply.

Households thus had greater capacity to borrow, allowing them to buy larger mort-

gages and accumulate greater personal debt. Yet, despite its important effects on hous-

ing markets, international financial liberalization fails fully to account for the wide

cross-national variation in housing prices among developed countries. Financial liber-

alization and reductions in nominal interest rates impacted all advanced economies in

the 1980s, 1990s, and 2000s. And although there was heterogeneity in the speed of

financial liberalization (countries that liberalized capital markets earlier witnessed

smaller nominal interest rates declines during the 1980s and 1990s than those that

liberalized later), heterogeneity in interest rate declines does not fully explain the

divergence in housing price growth across the OECD.

Figure 1 presents bivariate comparisons of changes in nominal/real interest rates,

and nominal/real housing inflation, between 1990 and 2007 for seventeen OECD coun-

tries15 (we select 2007 as the end date, because the 2008 global financial crisis marked

a sharp break in previous trends). Reductions in nominal interest rates fail to correspond