Since the mid-1980s, the average real (RPI-adjusted) UK house price has more than doubled, rising around one and a half times as fast as incomes. Economists’ diagnoses of the root cause varies – from anaemic supply, to the consequences of financial deregulation, or even a bubble. In our recent paper, we explore the role of the long-run decline in the real risk-free rate in driving up house prices. Low interest rates push up asset prices and reduce borrowing costs. We find the decline in the real risk-free rate can account for all of the rise in house prices relative to incomes.
Who is living in private rental properties, and why? The buy-to-let market has been headline news recently. Typically the story has been profit-hungry landlords squeezing out first-time buyers. But landlords are only half of the story. This post examines the rental market from the perspective of tenants. Our work suggests demand for private rental properties cannot explain all of the growth pre-crisis, but the case for over-exuberance is inconclusive. We think that factors driving tenant demand, including demographics, social housing and credit availability, accounts for around half of the growth in the Private Rental Sector (PRS) pre-crisis and over 80% post-crisis. The most important driver post-crisis has been tighter credit conditions, which generated demand for an additional 1 million PRS properties. Looking ahead, we project that tenant demand will drive the PRS to swell by up to an additional 1 million properties between 2014 and 2019. If tenant demand were the only factor in play this would translate to annual growth in the number of buy-to-let mortgages of 2-7%.