Macroeconomic drivers of London
Petros Stavrou Sivitanides
Department of Real Estate, Neapolis University, Pafos, Cyprus
Purpose –The purpose of this paper is to validate and quantify the effect of key macroeconomic drivers on
London house prices using annual data over the period 1983–2016.
Design/methodology/approach –Within this context, the authors estimate alternative error-correction
and partial-adjustment models (PAMs), which have been widely used in the empirical literature in modelling
the slow adjustments of house prices to demand and supply shocks.
Findings –The results verify the existence of a strong long-term relationship between London house prices
and key macroeconomic variables, such as UK GDP, London population and housing completions. A key
finding of the study relevant to the debate on the causes of the housing affordability crisis is that the results
provide little evidence in support of the argument that user demand, which is captured in the author’s model
by Greater London population, may have had a diminished role in driving house price inflation in London.
Practical implications –The practical and policy implications of the results are that increased
homebuilding activity in London will undoubtedly help limit house price increases. Also, any potential
reduction of immigration and economic growth due to Brexit will also have a similar effect.
Originality/value –The originality of this research lies in the use of annual data that may better capture the
long-term effect of macroeconomic drivers on house prices and the estimation of such effects through both
error-correction and partial-adjustment models.
Keywords House prices, Housing market, London house prices, London residential market,
House price determinants, House price drivers
Paper type Research paper
The housing market is a very important segment of national economies in the developed
world, as it is a large part, if not the largest, of their property markets. The London
housing market is not only by far the largest and most active residentialmarket in the UK,
but also one of the largest and most active in Europe, attracting investors from all over the
globe. In addition, a number of empirical studies have confirmed the “ripple effect”of
London/Southeast house price movements on UK regions (MacDonald and Taylor, 1993;
Meen, 1999; Wood, 2003) further highlighting the importance of this market in assessing
house price movements across the major housing markets in the UK.
The importance of the London housing market and its ripple effect on regional markets
becomes even more critical in light of the UK housing affordability crisis, which has been
brought about by near-continuous price increases since the mid-1990s (Rossall, 2015). These
price increases have led to decreasing homeownership rates, and an increasing number of
individuals turning into long-term renters, or even becoming homeless. As noted by a
number of analysts, this crisis is especially severe in the Southeast of England and the
London urban area, which have registered the steepest house price increases (Hilber, 2015).
A number of analysts have highlighted the dichotomy of housing demand from users and
investors and emphasised the role of investment demand, especially in London and the
Southeast, in driving these steep house price increases (Gallent et al., 2018; Rossall, 2015).
According to Rossall (2015), the major source of investment demand for housing in UK
has been primarily individuals of high net worth (both of domestic and foreign origin).
Institutional investors (both domestic and foreign) have been heavily investing for long time
in ground rents and student housing, but there has been an increasing interest for
investments in the private-rented housing sector (Rossall, 2015). An IPF survey of
Journal of Property Investment &
Vol. 36 No. 6, 2018
© Emerald PublishingLimited
Received 26 February 2018
Revised 15 June 2018
Accepted 18 June 2018
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