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.
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.
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.
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.
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.
