With immigration on the increase and interest rates rising the claim that high house prices are caused by immigration is going around again.

I am sceptical, and not just because the original claim came from Dominic Raab, who is wrong on pretty much everything.

On paper the link between immigration and house prices seems pretty straight forward. The higher net immigration is the more people there are. More people means more demand for houses, and increased demand for houses will lead to an increase in prices.

But the maths doesn’t bear this out. There is no real world relationship between house prices and population growth.

This is population growth and house price growth for the last 15 years

Some of the numbers are crazy – during Covid the population actually fell, but house prices soared. We don’t have a full set of data for 2023 but we are all set for record migration into the UK and a small fall in house prices.

I know what you are thinking – what would this look like as a graph?

After all of those headlines about hordes of immigrants flooding into the country population growth is actually pretty low and pretty stable. If the Labour force is growing at less than 0.5% a year it is hard for the economy to grow much faster than that without lots of capital investment and new technology. At the moment the labour market isn’t growing much, capital investment is low due to uncertainty and high interest rates, and until that changes growth in the UK economy will be slow for the forseeable future.

So why doesn’t the housing market behave like classical economics would suggest? How has the normal relationship between supply and demand broken down?

Firstly because there is no such thing as the UK housing market. You can’t buy a house cheap in Sunderland and move it down to London and sell it where it is worth more. What there really is are lots of very local housing markets, each with their own patterns of supply and demand. In each of those locations supply is fixed – there are a limited number of houses, and it is hard in the UK to build more.

But that doesn’t explain how the UK housing market became so over heated, and so far removed from supply and demand. As an illustration the UK housing market is worth 3.5 times GDP. This means that all of the wealth tied up in property only exists as long as the majority of owners don’t sell and realise that increase in value – there isn’t anything like enough money in the UK to buy all of the properties. If they all tried to sell at once prices would fall by 70%+

So what is really behind record house prices?

One of the reasons is people like me. Household sizes have shrunk, which means that we need more houses to accommodate the same population. Since my divorce I live in a 3 bed house, and my ex lives in a 5 bed house. We have more bedrooms than we can possibly need.

A lot of the problem is restrictive planning permission – Councillors lose their seats if they approve house building, which creates an incentive not to build more house in high demand areas to keep prices inflated. The Tories are particular culprits, but the LibDems and Greens are nearly as bad.

But the biggest reason is Government policy. Since 2010 governments have deliberately inflated property prices in order to buy political popularity. The rise of house prices has matched the rise of the Conservative Party from coalition Government to landslide.

Let’s have another look at the graph again.

Brown was chucked out of Downing Street following a massive house price crash. Cameron won an unexpected majority off the back of a rising property market. Theresa May foolishly called a snap General Election as the market was cooling post the Brexit vote. Boris Johnson rode a house price bubble to a landslide. Truss crashes everything. Sunak languishes in the polls with rising interest rates and falling house prices, and not a lot he can do about it.

House prices in the UK aren’t a function of markets. They are inextricably linked to UK politics, in particular the fortunes of the ruling Conservative Party.

Right now we have a housing bubble because politicians created one, using fiscal and monetary policy. That approach always carried a risk that stoking house price inflation would one day feed into broader inflation across the economy. A terrible Brexit deal which drove up prices carried that inflation into the wider economy, amplified by Covid and Ukraine. Inflation in the UK is now 4 times higher than Spain.

We need to build more house, and to try and find ways to deflate the property bubble gradually, avoiding a more dramatic correction. Because right now the Government is stuck, trying to reduce inflation without hammering the housing market and with it their election chances.

https://eprints.lse.ac.uk/86571/1/sercdp0223.pdf