The report authored by Josh Ryan-Collins, looks at the role that housing as an investment has played in pushing up house prices. The report outlines the factors behind the rise in prices and outlines potential options to resolve the issue. This blog examines the analysis.
Summary
The combination of four major factors has led to an increased demand for housing as an investment good in the UK and other high-income economies since the 1980s, resulting in house prices rising at a faster rate than incomes:
• developments in mortgage credit markets;
• financial innovation;
• low interest rates; and
• government policies favouring owner occupier and investor housing.
The causes
Mortgage credit markets
The report sets out a range of policy decisions, which have impacted on housing and house prices. They illustrate that "The deregulation and liberalisation of mortgage credit the 1970s, 1980s and 1990s in the UK … these reforms aimed to increase levels of homeownership. However, they resulted in a huge expansion of mortgage credit, which helps explain the rapid rise in UK house prices from the 1980s.” They point out that “There is a correlation between the rising mortgage credit flows and the house price to earnings ratio from the mid-1990s up to the financial crisis."
Financial innovation
The report notes the development of Buy to Let mortgages. This phenomenon creates competition between those wishing to live in a property and those seeing an investment opportunity. They also note the increasing share of house purchases using cash indicating that in 2023, 34% of purchases were by a cash buyer. Since the Great Financial Crisis, overseas investment in property has increased dramatically. A recent study is cited which “estimated that foreign property buyers have pushed up house prices in Britain by 17% over the last two decades."
Low interest rates
A significant element in explaining increases in house prices is the relationship between interest rates and asset values. A number of reports have highlighted this previously including the Bank Underground and Ian Mulheirn. This paper reiterates the issue – “When it comes to demand for residential property as an investment, key determinants are the rates of return that could be earned on wealth held in forms other than housing and, for buyers requiring mortgages, the cost of borrowing.” Using the rate of return on government bonds, regarded as the safest of assets, as a marker, they note that since the Great Financial Crisis, returns on these have been negative.
Government policies favouring owner occupier and investor housing
Since the Great Financial Crisis overseas investment in housing rose considerably “ Between 2014 and 2016, for example, 13% of all homes purchased in London were bought by overseas investors and around half of these were of housing valued at less than £500,000. A recent study estimated that foreign property buyers have pushed up house prices in Britain by 17% over the last two decades.” A number of corporate structures mainly registered in offshore tax havens bought around 28,000 properties and land in London to the value of £100 billion between 2009 and 2015.
The report points out that a significant number of households have additional space, a phenomenon largely associated with owner occupiers particularly those in older age groups whereas there is a higher share of those in rented properties with a lack of space.
Source
Ryan-Collins, J., (October 2024), The demand for housing as an investment, Drivers, outcomes and policy interventions to enhance housing affordability in the UK, UCL Institute for Innovation and Public Purpose (IIPP), Report
The report can be found here:
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