Are immigrants pushing house prices up?

17 December 2012

"More than one third of all new housing demand in Britain is caused by immigration.  And there is evidence that without the demand caused by mass immigration, house prices could be ten per cent lower over a twenty year period."

Theresa May, Speech on 'An Immigration System that Works in the National Interest', December 12, 2012

"I don't think it is sensible to say that we should [...] keep rich investors out of our domain in order to allow property values to decline. That would lead to a fall in the equity of everybody in their property in this city. For the life of me I cannot see the economic logic."

Boris Johnson, The Andrew Marr show, December 16, 2012

Following Theresa May's speech to Policy Exchange, concerns about the impact of immigration on the British economy have once again taken centre stage. These concerns have primarily focused on rising house prices and wages. In this factcheck, we'll look at two reports on immigration and housing which come to very different conclusions. 

Throwing in his tuppence worth on the Andrew Marr show, Boris Johson accepted the fact that within the London market "property values are very much driven by the confidence of inward investors in this city who come to buy houses," but he then added that "keeping rich investors out of our domain in order to allow property values to decline" did not make economic sense. 

Though there was something of a consensus in the press that Boris Johnson was criticising Theresa May, they're not necessarily at odds over the fundamental point of the debate: immigration drives house prices up. 

But what is the evidence for this widely held view?

We contacted the Home Office to ask for a source for Theresa May's claims, and were told to look into a number of reports drafted by the Migration Advisory Committee (MAC). One of these reports, penned by MAC and the London School of Economics (LSE), centres on the impact of migration  - primarily Tier 1 and 2, i.e. skilled and highly-skilled workers  - on access to housing and the housing market. 

The report argues that:

"the impact on house prices of the accumulated increase in Tier 2 type immigrants over a five-year period is likely to be well below 1%. This might generate some transfer of properties to the rented sector but the effect on total new supply is likely to be very limited." [emphasis added]

It also goes on to say: 

"There is very little reason to assume that the impact of migrants will be any different from that of general demand."

We therefore assume Theresa May didn't draw the conclusions made clear in her speech from this particular report.  

If we dig a little more, we find references to a 2007/8 report for the House of Lords, prepared by Prof. Stephen Nickell, the warden of Nuffield College in Oxford. Prof. Nickell claimed that house prices would be 13% higher with net migration of 190,000 a year over 20 years than if there was no immigration.

According to the House of Lords report, "the majority of recent immigrants live in the private rented sector," and overall "rents have been largely unaffected as some have crowded into existing properties and rented poor quality housing shunned by the local population." 

However, the report concluded that:

"Immigration is one of many factors contributing to more demand for housing and higher house prices. We note the forecasts that, if current rates of net immigration persist, 20 years hence house prices would be over 10% higher than what they would be if there were zero net immigration. [emphasis added]

"Housing matters alone should not dictate immigration policy but they should be an important consideration when assessing the economic impacts of immigration on the resident population in the UK."

We also dug out another report by University of Cambridge, on the impact of immigration on house prices. Interestingly, this report - which was published in 2011 - reached entirely different - and far from straightforward - conclusions. 

Though in principle, immigrant inflows increase the demand for housing, which in turn leads to an increase in house prices and rents, immigration may be associated with offsetting native outward migration (in other words, UK residents leaving the country).

The University of Cambridge study concluded that an immigration inflow equal to 1% of the local initial population leads to a reduction of 1.6% in house prices. Their evidence suggests that what drives house prices up is mostly "branching deregulation, particularly in metropolitan areas where construction is inelastic for topographic reasons."

It's worth pointing out that the University of Cambridge study employed a different methodology from the House of Lords report by using data disaggregated by local authorities. This is because "immigration may have important economic effects at the local level which are only captured when the labour market is defined at a sufficiently disaggregated level." 

The author of the study divided England and Wales into ten government office regions and repeated the analysis of the effects of immigration on house prices using this definition of local market. The author explains that "the estimates are more imprecise because the sample is smaller," and there is no evidence that immigration has any effect on house prices once regions are aggregated to this level.


This last study also concluded that immigration reduces native wages, something else that was picked up in Theresa May's speech and on which we'll focus in our next factcheck. 


Flickr image courtesy of Images_of_Money

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