A 1% increase in the number of immigrants in a local community in the UK leads to a 1.7% fall in house prices. This is because the wealthiest in the community tend to move elsewhere, reducing demand for houses in that area.
But the negative impact of immigration on house prices only occurs in areas where the general level of education of the immigrants is low. In areas where immigrants tend to be better educated – for example the City of London – their higher wages counteract the effect of locals leaving and may actually lead to a rise in house prices.
These are the findings of the first study to examine the effect of immigration on UK house prices. The research by Filipa Sá, which is published in the September 2015 Economic Journal, notes that there has been a well-publicised rise in both immigration and house prices over the last 20 years, with immigrants now accounting for 13% of the working-age population and house prices more than doubling. This has led many to suggest that the rise in immigration has been a cause of rising house prices.
But by combining immigration data from the UK Labour Force Survey and the Worker Registration Scheme with house price data from the Land Registry, the study finds that a rise in the number of immigrants by 1% of the local population leads around 0.9% of the native local population to move elsewhere. These tend to be the highest earners while the new immigrants tend to be paid below the average wage of the area.
This reduction in the overall income of the community reduces the demand for houses in that area, lowering their prices. But, as the author stresses, the effect depends on local people moving out and does not mean that prices across the country are lower, only in the areas where there are a lot of immigrants.
Immigration into a local authority in the UK leads to native out-mobility and has a negative effect on local house prices, according to this study. Combining immigration data from the UK Labour Force Survey and the Worker Registration Scheme with house price data from the Land Registry, the research finds that:
· Natives respond to immigration by moving to different areas and those who leave are at the top of the wage distribution.
· This generates a negative income effect on housing demand and pushes down house prices.
· In particular, an inflow of immigrants equal to 1% of the local population reduces house prices by 1.7%.
· The negative effect of immigration on house prices is driven by local areas where immigrants have lower education.
This is the first study to examine the impact of immigration on house prices in the UK. It shows that the impact crucially depends on the mobility response of natives.
There has been a significant increase in both immigration and house prices in the UK in recent years. Until the mid-1990s, immigrants accounted for less than 8% of the working age population in the UK. Today, they account for more than 13%. At the same time, average house prices have grown from just over £60,000 in 1995 to over £160,000 in 2010.
These figures suggest correlation between immigration and house prices, but they do not imply causality. Using data for England and Wales disaggregated by local authority, this study examines the effect of immigration on house prices and highlights the channels through which this effect takes place.
The sign and magnitude of the effect of immigration on house prices is theoretically ambiguous. In principle, immigrant inflows would increase the demand for housing. Combined with an upward-sloping housing supply, this would lead to an increase in house prices and rents.
But immigration may be associated with offsetting native out-migration. If the offset is complete, the local population would remain constant. In this case, housing demand may still be affected if the change in composition of the local population leads to a change in local income. This would affect housing demand and house prices via an income effect.
The empirical results suggest that immigration has a negative effect on house prices. An inflow of immigrants equal to 1% of the local population reduces house prices by 1.7%.
A simple theoretical model and empirical estimates of native population growth and mobility suggest that one explanation for this negative effect is the mobility response of natives. The estimates show that an immigrant inflow equal to 1% of the local population leads to a native outflow equal to 0.868% of the local population and increases the native out-migration rate by 0.123 percentage points.
Looking at the wage distribution of the local population, the study finds that local areas with high immigration tend to be at the bottom of the wage distribution. This is mostly due to the fact that natives have lower wages in high immigration cities.
This finding can be explained by two factors:
· First, there is some evidence that immigration has a negative effect on native wages at the lower end of the wage distribution.
· Second, natives who leave the city are at the top of the wage distribution. This generates a negative income effect on housing demand and pushes down house prices in local areas where immigrants cluster.
Behind these overall effects, there are some important differences depending on the level of education of the local immigrant population. The negative effect of immigration on house prices is driven by areas where the share of immigrants with lower education is high.
A possible explanation is that in local areas where immigrants are more educated (and hence have higher wages), immigration exerts a positive income effect on housing demand that counteracts the negative income effect from native out-mobility.
''Immigration and House Prices in the UK'' by Filipa Sá is published in the September 2015 issue of the Economic Journal. Filipa Sá is a senior lecturer at King''s College London and a research fellow at the Institute for the Study of Labor (IZA), Bonn