What is really driving the inflation of the UK’s property market

What is really driving the inflation of the UK’s property market

According to a new academic research paper, the assumption that Britain’s house price growth over the last few decades is driven by the gap between supply and demand is pretty far from the truth.

Even if you’re not the keenest reader of property news, don’t own your own home and maybe don’t even have an interest in ever doing so, one property headline quite possibly didn’t sneak past you: The UK’s property market’s supply is too low and demand is too high.

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In a new paper, however, Dr. Alisa Yusupova from Lancaster University suggests that Britain’s house price growth is based on speculation and exuberance rather than a gap between supply and demand.

An abstract from the paper states:

“Neither demand-side factors such as household income, mortgage rates and credit availability, or the supply of new houses explain price rises during some of that period. We find that a comprehensive model of housing that includes demand side factors such as household income, mortgage rates, credit availability, demographics, inflation as well as supply side factors such as supply of new houses relative to the growth in working age population, and regional spillover effects, cannot fully capture house price dynamics in certain periods of the sample.”

Instead of simply blaming a lack in supply, Yusupova argues that bubbles of “house price exuberance” have started off in London and then made their way through the country.

House price index figures ‘overstated’

Since the 1980s, house prices have climbed drastically across the country, with the most significant inflation happening after the global financial crisis.

Here a chart of the figures collected by the Office for National Statistics (ONS):

Whether or not Yusupova is on the right track with her theory remains to be seen. She is, however, not the only one to put this thought forward. Societe Generale strategist, Albert Edwards, only last year blamed the Bank of England for inflating a bubble in Britain’s housing market.

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