Friday 20 March 2020 13:00 - 14:30

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About this event

We test to what extent the extraordinary growth in real house prices in England—especially in London and the South East of the country—is driven by local fundamentals vis-à-vis macroeconomic factors. Employing a unique panel dataset of 353 Local Planning Authorities (LPAs) in England between 1974 and 2018, LPA and year fixed effects, and an instrumental variable-strategy to identify endogenous local supply constraints, we reaffirm an earlier finding that house prices respond much more strongly to given labor demand shocks in LPAs with tight local regulatory constraints and physical barriers to development. We find that the ‘unexplained variation’ in house prices at macro-level—captured by the year fixed effects—is quantitatively important and strongly positively associated with variables that capture the real economy. Holding the latter constant, credit conditions explain at most 30% of the remaining variation in aggregate house price growth and the mortgage interest rate does not matter in a statistical sense, while conditional on credit conditions, the real economy explains 36% of the remaining variation. An analysis of the residuals from the baseline specification further reveals that the affordability crisis in Greater London cannot be substantively driven by global investor demand and interactions of the interest rate with local supply constraints are economically unimportant. When we replicate our baseline analysis with rental data, we obtain qualitatively similar results.

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Directions

Urban and Regional Economics Seminars are part of the CEP's Urban and spatial programme.