Demand from foreign investors has had a significant and positive effect on UK house price growth over the last 15 years, according to research by Filipa Sá, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018. Analysing a new dataset released by the Land Registry, which records all property transactions in England and Wales registered to overseas companies, the study finds that:
• Average house prices in England and Wales in 2014 would have been about 19% lower in the absence of foreign investment (at approximately £174,000, compared with an actual average of about £215,000).
• The impact on house prices is concentrated mostly in the South East and major cities in the North, such as Liverpool, Leeds and Manchester.
• The effect of foreign investment on house prices is larger in local authorities where housing supply is less elastic – due to land scarcity or regulatory constraints.
• Foreign investment does not just raise prices of expensive homes, but has a ''trickle down'' effect to less expensive properties.
• There is no evidence that an increase in foreign investment leads to an increase in housing construction or in the share of vacant homes.
• There is evidence that foreign investment reduces home ownership rates, suggesting that some residents may be priced out of the market in areas where foreign investors are more active and have to rent rather than own their homes.
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One of the factors behind house price growth in countries such as the UK, Australia and Canada is demand from foreign investors. This study looks at data for the UK and argues that foreign investment had a significant and positive effect on house price growth in the last 15 years. This effect is present at different percentiles of the distribution of house prices and is stronger in local authorities where housing supply is less elastic. Foreign investment is also found to reduce the rate of home ownership. There is no evidence of an effect on the housing stock or the share of vacant homes.
Average house prices in England and Wales have almost tripled in the last 15 years, from just over £70,000 in 1999 to about £215,000 in 2014. Apart from a reduction in 2009, at the height of the global financial crisis, house prices increased every year during this period. Behind this average lies considerable regional variation, with average prices in the prime London area of Kensington and Chelsea reaching £1.3 million in 2014.
One of the factors that may be behind this increase in house prices is demand by foreign investors. This study uses a new dataset released by the Land Registry, which records all property transactions in England and Wales registered to overseas companies.
Using these data, the research calculates the share of total transactions registered to overseas companies (in volume and in value) and observes that these shares display a similar upward trend to house prices, as shown in Figure 1. As for house prices, foreign investment exhibits considerable regional variation and is concentrated mostly in the South East and major cities in the North, such as Liverpool, Leeds and Manchester.
Empirical methodology
Professor Sá uses regional variation in house price growth and the share of residential property transactions registered to overseas companies to identify the effect of foreign investment on house prices. To overcome endogeneity in the locational choice of investors, the study constructs an instrument for foreign investment based on economic shocks abroad. The model is estimated on data for local authorities in England and Wales for the period from 1999 to 2014.
Foreign investment increases house prices
An increase of one percentage point in the volume share of residential transactions registered to overseas companies leads to an increase of about 2.1% in house prices.
To have a better idea of the magnitude of this effect, the study uses the model to construct the counterfactual evolution of house prices when the share of foreign investment is set to zero. Average house prices in England and Wales in 2014 would have been about 19% lower in the absence of foreign investment (at approximately £174,000, compared with an actual average of about £215,000).
Looking at the effect at different points of the distribution of house prices, foreign investment does not just raise prices of expensive homes, but has a ''trickle down'' effect to less expensive properties.
The effect of foreign investment on house prices is larger in local authorities where housing supply is less elastic – due to land scarcity or regulatory constraints.
Other housing market variables
Looking at the effect on the housing stock, there is no evidence that an increase in foreign investment leads to an increase in housing construction. Nor is there evidence in favour of ''buy-to-leave'' – the hypothesis that foreign buyers purchase properties purely for capital appreciation and do not occupy them or rent them out.
But there is evidence that foreign investment reduces home ownership rates, suggesting that some residents may be priced out of the market in areas where foreign investors are more active and have to rent rather than own their homes.
Policy implications
These findings are useful to inform the policy debate on the impact of foreign investment on the housing market. This topic has attracted the attention of the Mayor of London, Sadiq Kahn, who has recently launched an inquiry into the consequences of foreign property ownership in the capital.
Other countries – such as Australia, Switzerland and Canada – have also been debating this issue and have introduced policies to control foreign investment in the housing market.
The Effect of Foreign Investors on Local Housing Markets: Evidence from the UK – Filipa Sá
