Population and house prices in the United Kingdom

DOIhttp://doi.org/10.1111/sjpe.12166
Date01 May 2018
Publication Date01 May 2018
AuthorCreina Day
POPULATION AND HOUSE PRICES
IN THE UNITED KINGDOM
Creina Day*
ABSTRACT
Real house prices rise in the United Kingdom amid growing concern of an
impending correction. The rate of household formation has increased with strong
population growth, due to elevated rates of natural increase and net migration,
and lack of growth in average household size, due to a rise in single-person
households with population ageing. This paper presents an overlapping genera-
tions model of housing, endogenous labour, savings and growth to analyse the
effect of an increase in the household formation rate and speculative demand
under rational expectations on house prices in a general equilibrium. We find
that real house prices rise over time if the rate of household formation outstrips
the rate of housing supply, but do not follow a speculative bubble path in the
long run. The results explain why the upward trend in real house prices reflects
market fundamentals and has continued despite population ageing as the number
of working and retired households grows relative to the number of older people
seeking to sell.
II
NTRODUCTION
A baby is born every 40 seconds and somebody dies every 50 seconds, on
average, in the United Kingdom. There is a net gain from overseas of one
immigrant every 2 minutes and 50 seconds. As a result, the overall population
increases by more than 1000 persons daily, and recently surpassed 65.35 mil-
lion persons residing in 27.1 million households. While young people seeking
to enter the housing market have faced steep price rises, housing has become
an increasingly important source of wealth for older people when they seek to
exit the market. This paper explains why the number of new households has
grown with population in the United Kingdom and develops an overlapping
generations model to analyse the role of strong population growth and specu-
lative demand in rising house prices.
The OECD recently warned that house prices appear overvalued but con-
tinue to rise in Australia, Canada, New Zealand and the United Kingdom,
posing a risk of impending sharp corrections (OECD, 2016). Figure 1 depicts
*Australian National University
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12166, Vol. 65, No. 2, May 2018
©2018 Scottish Economic Society.
127

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