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The housing crisis the real cause – the multi-causal theory

  • rpwills
  • Nov 28, 2025
  • 8 min read
There are two distinct schools of thought on why house prices go up.  So different in their underlying assumptions that they exist in parallel universes. 

 
One is based on the question of supply or rather the lack of it.  It is asserted that a lack of supply lies at the root of housing problems, rising prices, lack of affordability regarded as the main consequences.  This approach reflects mainstream thinking, supported by lobby groups, a number of academics and dominates the political discourse. 
 
The other alternative discourse is more nuanced, essentially dismissing the supply as a major cause and instead is based on an understanding of how changes in housing finance policy, the relationship between interest rates and asset values and the effect of earnings on prices. We could call this the multi-causal theory or approach as it incorporates the various elements which determine changes in house prices and values and impact on affordability and access to housing. 
 
This post looks at the evidence contained in the multi-causal theory. There are three main sources of information – two reports published under the auspices of Bank Underground, a series of reports by Ian Mulheirn and a post by Steve Keen.  Other authors have also been cited.
  
Summary
The lack of supply theory of why there are housing problems falls apart when any analysis of the evidence is performed.  Its dominance reflects its simplicity ‘its supply and demand innit?’ and the pervasive influence of vociferous lobby groups, developers,  certain academics and commentators. Adherence to it for many is an act of faith accepted uncritically.  The alternative theory is more complex, taking account of the various factors which operate in the real world.  
 
Looking at the evidence indicates that contrary to the myth, there is not an under-supply of housing. The number of additional dwellings has risen year on year and in 2021 there were 1.5 million unoccupied dwellings in England.
 
The main elements of the multi-causal theory are deregulation of housing finance; the dual role of houses as assets and providing a service; increases in earnings; lower earnings for younger people; and a reduction in social support.   It is important to note that lack of supply is not the cause of housing problems.
 
Together these have resulted in higher house prices and rents and significant problems for those seeking suitable and affordable accommodation.
 
 
Discussion
The first element to analyse is what is the situation regarding supply?   Is there a lack of supply?
 
Is there a shortage of supply?
The answer to that question is “No. Back in 1991 there were just over 3.0% more houses than there were households in the UK according to government data. Today, using the ONS’s latest household estimates, there appear to be 5.2% more places to live than there are households that want to live in them. In fact growth in the stock of dwellings appears to have outstripped that of households over the past 50 years or so. This is a strange sort of ‘endemic shortage’.”  [Mulheirn, 2017]. The 2021 census from ONS revealed some 1.5 million more dwellings than households.  Of these 172,545 were holiday homes.  The English Housing Survey in 2023, estimated a total of 980,000 second properties, presumably including both second homes and holiday lets. So we have a significant number of dwellings not actually available to house people.
 
Flawed forecasting
One rationale used for high housing targets have been forecasts of household growth. Mulheirn pointed out that they were all based on one original source, using data from the DCLG.  [1 Mulheirn, 2018]. And that the methodology used in the original forecast was itself flawed. This created a situation where household growth was estimated to rise far more than was actually the case.  This was borne out by census data which gave a clearer idea as to household numbers and growth.
 
How much have house prices increased?
Various reports have shown how house prices have risen compared to earnings.  The following is just one example.  “House prices have skyrocketed by 2,385% in 50 years – increasing from just £10,978 in 1975 to £272,819 in 2025.   However, salaries have grown by 1,400% in the same period.  In fact, if wages had kept pace with property inflation, today’s average salary for two people would need to be £116,303.  This means current salaries are £46,103 short of keeping pace with house prices.  Alternatively, if house prices had only risen in line with wages, the average house would cost £164,670 today, meaning current prices are over £108,000 higher than they should be”. [Mojo, 2025].
 
So why have house prices increased so much?
Deregulation
A significant factor in the rise of house values can be attributed to the change in policy in the 1980s brought in under the Thatcher government.  Keen states - “…  before 1960, house prices rose at the same rate as consumer prices did. At the average rate of relative increase before Thatcher, it would have taken 280 years for house prices to double in real terms. At the rate between 1945 and Thatcher, real house prices were doubling every 40 years. After Thatcher, real house prices doubled every 23 years.” [Keen, 2025].
This is made worse by a feedback loop where - “At the same time, rising house prices support an increase in the supply of mortgage credit because banks collateralise their lending against the value of the house (and land) they are lending against.” [Ryan-Collins, 2024].
 
Housing and asset values
Houses are different to most ‘goods’ in that they both provide a service – somewhere to live and are also an asset as noted by Lewis and Cumming (2019).  A household gets the service either by purchasing the dwelling or renting one. In terms of a dwellings value as an asset  “Economic theory says asset prices should be determined by the value of future income flows. So how much is a bulb that produces £100 of tulips annually worth? If real interest rates on other assets are say 10%, then people would be willing to pay £1,000 for the bulb to get the same return. If they fall to 5%, the value of that same stream of flowers doubles to £2,000. Supply hasn’t changed, the price of tulips hasn’t changed either, but bulb prices have doubled.” [Lewis and Cumming, 2019].
 
After the Great Financial Crisis GFC), lower real interest resulted in rising property prices as the returns on assets rose in relation to interest including the return on government bonds. Miles and Monro in 2020 stated “… we estimate that the long-run effect of the decline in the risk-free rate increased real house prices by about 108%; the increase in household income increased house prices by around 80%; whilst the increased net tax obligations pushed house prices down by around 15%.” 
 
Quantitative easing (QE), affected the interest/asset value relationship.  
“One of the key mechanisms in the counterproductive evolution of UK policy was the transmission of QE’s effects into interconnected markets, especially the housing sector. As QE reduced interest rates and increased liquidity, it unintentionally inflated asset prices, including property values. Investors seeking higher returns channelled capital into property markets, driving up house prices and exacerbating affordability issues.” [Mandelkern and Oren, 2025]. 
 
As housing has been seen as an asset with potential for growth, it has led to investors purchasing property.  “A recent study estimated that foreign property buyers have pushed up house prices in Britain by 17% over the last two decades.”  While “between 2009 and 2015 complex corporate structures mostly registered in offshore tax havens purchased nearly 28,000 London properties and land parcels at an estimated value of £100 billion.“ [Ryan-Collins, 2024].
 
Another element of investors purchasing dwellings is the growth of the Buy to let market.  According to a report by Hamptons, there were over 400,000 companies registered for buy-to-let in February 2025.  “Companies House now has more registered buy-to-let companies than any other type of business. There are nearly four times as many buy-to-let companies operating than either fast food takeaways or hairdressers”.  [Hamptons, March 2025]. 
 
Earnings
Hantzsche, and Jeanes, (2025), in their paper conclude that real income growth is the main driver of house price changes with higher mortgage rates responsible for reducing house price growth.  Although more difficult to evaluate, supply is not thought to play any significant role in house price changes.  The importance of earnings follows on from work carried out by Miles and Monro in 2020 as indicated previously. 
 
What else has changed?
 
Changes to housing support
Various commentators have noted the deteriorating situation of younger households in the housing market.  This partly reflects the lower growth of earnings, which failed to keep up with house price growth.  But other policy changes have impacted on households.  Mulheirn (2017) identified three changes.  “First, young people’s incomes have fallen compared to others’ in recent years. …Second, the social housing stock had shrunk. In the mid-90s some 22 percent of the stock in England was social housing, sheltering people from market rates of rent. Last year that proportion was barely 17 percent. That’s over a million more low-income households now facing market rents than would have been the case had the proportion remained constant. Third, housing benefit cuts and caps have reduced the financial help that used to be available to people on lower incomes in the private rented sector.”
 
Affordable and social housing
The definition of ‘Affordable’ housing is problematical.  In essence, the share of affordable housing and social housing is lower than in the past. Shelter state that there has been a “ … decline in the number of new social rent homes over the last 70 years: from over 200,000 homes built in the mid-1950s to under 10,000 by 2023/24”.   [Shelter, 2025]. 
 
 
Conclusion
As the multi-casual theory explains there are a number of elements, which together contribute to the rising house values. These are deregulation, increasing asset values as interest rates fell, quantitative easing and higher earnings.   Again changes in supply are not regarded as playing a significant role contrary to the views and assertions of many commentators and politicians. 
 
“It’s true that greater supply would reduce rents and prices marginally. But most academic work on the subject tells us that no plausible amount of building will have a material impact on either problem. Oversimplifying our housing problems is leading policymakers down a blind alley — only when we grasp the real causes will we have a chance of solving the housing crises.” 2 [Mulheirn, 2018].
 
Notes
NB Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England or its policy committees.
 
Sources
English Housing Survey 2021 to 2022: second homes - fact sheet, Updated 17 July 2023, National statistics.
 
Hamptons, (March 2025),  February 2025 lettings index, Buy-to-let and Research — Mar 2025.
 
Hantzsche, A., and Jeanes, H., (13/11/2025), The keys to house price growth,
 
 
Miles, D and Monro, V., (2020), ‘What’s been driving long-run house price growth in the UK?’  Bank Underground Financial Stability 13 January 2020 7 Minutes, David Miles and Victoria Monro.
 
Mojo, (2025), 1975 vs 2025: How much harder is it for first-time buyers today?
Mortgage Insights.
  
Mulheirn, I, ( 2017), Part 1: Is there really a housing shortage? January 16th 2017.
 
Mulheirn, I, ( 2017), Parrots, housing and redistribution, Nov 13, 2017.
 
Mulheirn, I, ( 2019), Tackling the UK housing crisis: is supply the answer?, UK Collaborative Centre for Housing Evidence.  https://housingevidence.ac.uk/project/tackling-the-uk-housing-crisis-is-supply-the-answer/
 
Mulheirn, I, ( 2018), Fixing our broken housing crystal ball.  January 22nd 2018.
 
Mulheirn, I, (2018), Two housing crises.  28th March 2018.
 
 Mulheirn, I, (2021), Our housing problem is not just about how many homes we build, Monday September 13 2021, The Times. 
 
 
Mulheirn, I, ( 2021), Why is housing so controversial?  A theoretical schism, November 12th 2021.
  
Ryan-Collins, J. (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, Policy Report 2024/13. ISBN 978-1-917384-32-2
 
Mandelkern, R., and Oren, R, (January 6th, 2025), How Quantitative Easing went from temporary crisis-response to permanent policy change. London School of Economics and Political Science.  https://blogs.lse.ac.uk/politicsandpolicy/how-quantitative-easing-went-from-temporary-crisis-response-to-permanent-policy-change/
 
Shelter, (2025), Loss of social housing.
 
 
 

1 Comment

Richard Lovell
Richard Lovell
Dec 02, 2025

Remember ‘supply’ is the number of homes offered for sale. Newbuild is a component, but in many areas ‘supply’ will be mostly existing homes, so it’s the factors that persuade people to sell that are important.

It’s also important to define ‘demand’ since many commentators get confused between those with a desire to own a home and that desire matched with a financial capability (‘real demand’).

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