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.
I find that 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, I use the model to construct the counterfactual evolution of house prices when the share of foreign investment is set to zero. I find 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).
Looking at the effect at different points of the distribution of house prices, I find that foreign investment does not just raise prices of expensive homes, but has a ‘trickle down’ effect to less expensive properties.
The effect of foreign investors on local housing markets: Evidence from the UK