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

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 capitalism'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 adequately conceptualize how debt-driven growth operates across advanced economies.