Monetary policy and housing price reforms in the UK since the global recession of 2008

By Riya Jain & Priya Chetty on July 25, 2022

The economy of the United Kingdom has witnessed a roller coaster ride since the global recession of 2008 and Covid-19. These events permanently altered the house prices and credit market with changing trends in the buying capacity. Thus, there has been a needing on understanding how monetary policy has impacted the housing price and credit of the UK and resulted in the decline in the rising housing and credit market pace.

Witnessing a growth in real house prices by 250% from 1980 to 2018, the UK experienced growth in house prices at a rate more than the income growth.

Since the outbreak of the global recession in 2008, there has been a contraction in housing prices and credit of the economy result. For a long time, the Bank of England considered government policy and supply shortages as the reason for the rapid growth of housing prices. However, as banks focused on long-term housing price determinants, the role of interest rate in impacting housing prices has been determined. This resulted in a shift in focus on the recognition of housing as a key aspect for both financial assets and commodities.

Understanding the monetary policy of the UK

The monetary policy of a country is usually formulated by the highest bank of the country. This is based on certain yardsticks such as:

  • the rate of inflation,
  • the associated bank (interest) rate, and
  • the stock of assets.

The UK’s monetary policy depicts similar elements within its formulation adopting a committee-centric approach. For instance, The Monetary Policy Committee (MPC) of the Bank of England holds the significant authority of formulating and amending the financial policy of the country.

Schonhardt-Bailey (2014) asserts that the legislative setting of a country also shapes monetary policy. It is also observed to be a committee approach comprising of interaction and engagement between the central bankers (appointed by authority) and legislators (elected by citizens). Thus, monetary policy in the UK is based on an exchange of ideas, taking both experts’ and citizens’ purview.

Expansionary monetary policy in the early 1990s’

The monetary policy of the UK has undergone significant changes over a period of time, with the global recession of 2007-08, playing a significant role in shaping the policy. During the period of 1993-96, the monetary policy of the UK was majorly targeted toward inflation. This thereby caused repercussions in the income level of the citizens with higher unemployment rates and a series of country-bound recessions (Angeriz and Arestis, 2006; Galbraith, 2012).

This time monetary policy has been termed as ‘Expansionary Monetary’ policy as the focus was on boosting the share prices for helping shareholders and partakers of the financial market and trade (Coibion et al., 2012). These shareholders usually belong to affluent families, whose income witnessed a boost owing to the formulated expansionary monetary policy, thereby widening the gap in inequality. Doepke & Schneider (2006) highlighted other characteristics of UK expansionary monetary policy wherein low-interest rates favoured borrowers over lenders and savers. Individuals in the low-income group, who save most of their wealth in terms of liquid assets, were adversely affected due to their vulnerability to inflation-inducing monetary policies (Schonhardt-Bailey 2014; p.2). Thus, during the initial years, the monetary policy has not targeted economic development but majorly tackled inflation.

Transformation of monetary policy framework in the UK during the pre-crisis period

With the formation of the Monetary Policy Committee (MPC) in 1997 under the Labor Government, the control of Interest Rates was shifted from the Chancellor of Exchequer. The monetary policy witnessed a higher interest rate, framed based on International rates such as the USD and Euro (Cobham, 2013). During this period, the main focus of the monetary policy has been on the maintenance of price stability, economic growth and employment (Rodgers, 1998). 

Though initially, the interest rate increased and reached a level of 7.50% in the 3rd quarter of 1998. Following it, lower interest rates continued. During this period, the inflation rate has been averaging 2.40% against the target of 2.5%, with minimal deviation from the target of not more than 1% (Mumtaz and Theophilopoulou, 2015).

By the end of the 90s and the initial years of the 2000s, MPC on behalf of the Bank of England (BoE) improvised the monetary policy and based it on the Dynamic Stochastic General Equilibrium (DSCE) paradigm.

The DSCE paradigm has assumptions that there are no banks and expectations of all agents are formed rationally with no informational asymmetries. Even the markets is clear and there is prevalence of balanced growth equilibrium.

Henry 2013; p.3

During this time, monetary policy is focused on having lower mortgage and interest rates leading to a rapid rise in house price inflation. The Bank of England and MPC adapted this paradigm as they believed that policy won’t have much influence on consumers’ consumption. The immense expansion of credit volume and bank balance sheets could be dealt with by regulations (Pesaran and Smith, 2011). Thus, despite witnessing international changes in form of globalization and financial liberalization, the monetary policy has been restricted to lowering interest and mortgage rates.

Slow recovery post-recession of 2008

The monetary policy of the UK formulated in 1997 failed to take note of some significant characteristics (Henry 2013; p.4). –

  • Effects of globalization on non-increasing inflation equilibrium in the country.
  • Effect of rapid and extensive financial liberalization on the behaviour.
  • The financial fragility of the economy.

With the recession, the inflation rate has witnessed a sharp decline to a level of 0.50% and the inflation rate has been high i.e. 1.12% in 2010 Q2. Housing prices in the UK contracted in 2009 by 15% and the market remain subdued even after years of the financial crisis. Even the rate of mortgage approvals has declined to 61000 per month against more than 100,000 per month pre-crisis.

Thus, the housing market and credit market were witnessing slower growth rates and even the personal income of citizens has been reduced. The loopholes on part of the policy rendered the country difficulty in overcoming the financial crisis of 2007-08 for a greater period of time.

Monetary policy of UK post-recession

Post-recession monetary policy of the UK witnessed an eventual growth of 2.6% in 2014 and 3.1% in 2015, the strongest till the recession and among the other G7 countries. With the recovery of the UK economy, the personal income of citizens witnessed an increasing trend with an income of £8455 in the 3rd quarter of 2019.

The inflation rate has witnessed constant function with a maximum level of 1.30% in Q2 of 2011 and on average the rate of 0.48% from 2011 to 2020.

Such recovery is evident through improvisation in monetary policy by focusing on:

  1. having expansionary tactics and a low inflationary rate,
  2. improvement in the provision of infrastructure,
  3. an adaptation of green investment projects, and
  4. ensuring sustainable bank lending policies (OECD, 2015).

These adaptions served as precautionary measures in managing monetary stability risks. However, Mumtaz & Theophilopoulou (2015) apprehended that expansionary monetary policy during the recession and post-recession period (2007-2014) would again result in restricting the income flow to some handful population like in 1993-96. Thus, post-recession monetary policy again contributed to widening income inequality.

The post-recession scenario of the housing market in the UK

Money exercises a significant impact on house prices and credit. Furthermore, credit influences money and house prices. Thus, house prices in turn exert a significant effect on both money and credit (Goodhart & Hofmann, 2008).

The concept of money, housing price and credit are interlinked. After the financial crisis in the United Kingdom, there has been downward growth in interest rates, with a stable rate of 0.5% since March 2009.

Recently, the Bank of England and the MPC have voted to raise the rate again. The inflation being stuck at zero (The Economist, 2015b) the interest rate has been constant at 0.5% till the 1st quarter of 2016.

The economic condition of the denizens is also on the rise, with constant wage increases since 2010. This is most likely to continue in the near future too. Lower interest rates existing prior to September 2015 increased the demand for houses based on mortgages. Thereby, increasing the house prices to equilibrate demand and supply (Ungerer, 2015).

The presence of lower interest i.e. constant at 0.5% resulted in raising consumption and hence increasing the CPI for the UK. A rise in demand for houses resulted in an increasing housing price index to 113.992 in the 3rd quarter of 2017. But, with the rise in repo rates along with mortgage and credit card rates by the Bank of England and inflation at zero, the latest monetary policy is less likely to affect the mortgage holders.


With a rise of 2% in mortgage rates, an individual with a 75% mortgage on a house of £400,000 value will witness an increase of £4000 annual repayment. This rise is equivalent to 6% of the pay of the median mortgage holder, in the capital city of London.

The Economist, 2015a

Besides, with the country’s shortage of houses and increase in demand, the house price growth rate has constantly fluctuated. The highest rate recorded was 3.22% in the 3rd quarter of 2015 and reduced to 0.20% in the 4th quarter of 2021.

Rating agency Standard and Poor’s study projects that owing to a steady rise in income among professionals, the mortgage rate is 4.38% in June 2022. Across the UK, the outstanding residential mortgage loans have been £1,613.4 billion by end of Q4 in 2021 which is 4.7% more than in 2020. Even the value of gross mortgage advance has been £70.2 billion in Q4 of 2021, which is 8.4% lower than in 2020. Thus, post-recession housing price has witnessed a rise and an increase in mortgage loans representing an expansion of the credit market.

Monetary policy accelerates credit and housing price expansion

The housing and credit market is an important source for determining the consumption and financial status of the UK. In the pre-crisis period, the Bank of England has been focussing on the expansionary monetary policy with a lower interest rate to curb inflation. A rise in housing prices and credit was witnessed during this period.

But with the recession, less focus on international movements like liberalization or globalization resulted in a slow recovery pace. However, in recent times, with a change in monetary policy back to expansionary policy, the UK is witnessing an increase in housing prices along with a considerable increase in credits. This is more likely to affect the young generation of professionals than the aged, owing to the economic gap between the two (The Economist, 2015b).


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  • Ungerer, C. T. (2015) Monetary Policy, Hot Housing Markets and Leverage. 2015–048. Washington.

Priya is the co-founder and Managing Partner of Project Guru, a research and analytics firm based in Gurgaon. She is responsible for the human resource planning and operations functions. Her expertise in analytics has been used in a number of service-based industries like education and financial services.

Her foundational educational is from St. Xaviers High School (Mumbai). She also holds MBA degree in Marketing and Finance from the Indian Institute of Planning and Management, Delhi (2008).

Some of the notable projects she has worked on include:

  • Using systems thinking to improve sustainability in operations: A study carried out in Malaysia in partnership with Universiti Kuala Lumpur.
  • Assessing customer satisfaction with in-house doctors of Jiva Ayurveda (a project executed for the company)
  • Predicting the potential impact of green hydrogen microgirds (A project executed for the Government of South Africa)

She is a key contributor to the in-house research platform Knowledge Tank.

She currently holds over 300 citations from her contributions to the platform.

She has also been a guest speaker at various institutes such as JIMS (Delhi), BPIT (Delhi), and SVU (Tirupati).


I am a master's in Economics from Amity University. Having a keen interest in Econometrics and data analysis, I was a part of the Innovation Project of Daulat Ram College, Delhi University. My core expertise and interest are in environment-related issues. Apart from academics, I love music and exploring new places.