Why house prices go up – the most recent evidence

A recent post released under the auspices of Bank Underground, examined why house prices have increased since the mid 1990s. The authors Arno Hantzsche and Harriet Jeanes, state “Houses account for the largest share of total assets held by the UK household sector. Households’ spending and saving decisions depend in part on the price of these assets”  Therefore understanding the drivers of house price changes is essential in understanding how this important element of the economy operates.

 

Homeowners perceptions of the value of their property can impact on spending decisions and lower house values reduce the amount of capital against which people carry borrow. Changes in house price growth therefore have a wider impact on the economy. 

 

The authors state “Our aim is to provide an up-to-date tool that can both explain house price dynamics over the medium term and deliver robust forecasting performance over a three-year horizon, using a simple framework that captures the main drivers identified in the literature.”  

 

Summary

The main conclusion of the paper is 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.

 

Discussion

The paper looks at the use of a model to assess changes in house values from 1991 to 2023.  “It links short-term house price growth in real terms to changes in average interest rates on new mortgages and growth in measures of real household disposable income.”

 

The chart below shows the impact of various components that influence house prices:-

·        Orange bars - real income growth “ explain most of the house price boom pre-GFC as well as some of the weakness in house prices in the years that followed”

 

·        Yellow bars -  housing supply effect  deemed to be harder to evaluate.

 

·        Purple bars - Higher mortgage rates – these reduce house price growth.

 

• Pink bars – these measure the residual – basically unaccounted changes in house prices in the model.

 

 

 

 

When assessing the direct impact from Bank Rate on house prices through mortgage rates, and holding all else equal, the model indicates that house prices respond to a 100 basis points rise in Bank Rate with a 2.5% fall, which is fully realised after three years. This assumes that changes in Bank Rate are directly mirrored by an equal change in mortgage rates.

 

Chart 2

This shows changes in house prices, income, supply with a residual component since 2021. 

 

 

Conclusion

The model provides a useful means of tracking changes in house prices over time. The authors conclude that earnings play a significant part in increasing house prices, this supports work carried out by David Miles and Victoria Monro in 2020.   Again changes in supply are not regarded as playing a significant role contrary to the views and assertions of many commentators and politicians. 

 

Notes

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

Hantzsche, A., and Jeanes, H., (13/11/2025), The keys to house price growth,

 Housing market, Bank Underground,, Monetary Policy  6 Minutes.

 

Miles, D and Monro, V., 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