What is the one thing that would make the biggest impact on the housing crisis? Transport infrastructure
Professor David Miles and Professor James Sefton
Houses have become ever more expensive – relative to other living costs – since the mid-1970s, and are now proportionately three times as pricey in the UK as they were in the mid-1980s. In London, prices have risen far faster still. What’s driving the market? And will house prices continue to rise faster than the cost of living, or could they eventually fall?
Over the past 50 years, housing has become remarkably expensive, but this hasn’t always been the case. Imperial College Business School’s David Miles, Professor of Financial Economics, and Professor James Sefton, Chair in Economics, have been taking a longer than usual view of property prices, examining the market and factors from the mid-19th century onwards, across a sample of developed economies. For about 100 years (1870-1970), house prices rose only in line with the wider cost of living. While recent studies might look back at the last decade or try to predict the next five or ten years, Imperial College Business School has taken a historical view, and casts more than a century into the future.
Miles and Sefton used diverse data to build an economic model to help understand what drives property prices. They’ve pieced together information from some 65 historical, geographical and economic sources, looking at the cost of transport, the pace of improvements in commuting speeds, the cost of land, building materials and housing, and population growth rates. Using this data from developed countries, they have built economic simulation models suitable for a long horizon and have focused on a 250-year period (1870-2120).
One of the major reasons housing didn’t become more expensive from the mid-19th to the mid-20th century is the dramatic improvements in transport – trains, trams and roads and aeroplanes to a limited extent – during that period. “Our model suggests this was a leading factor in keeping property costs down, even as populations and real incomes grew substantially,” says Miles. But a slowdown in transport improvements from 1970, and the subsequent effect on commuting times, has had an impact on the cost of land.
“Two other key parameters also affect prices. One of these is how willing we are to live in more housing built on less land – high into the sky or beneath the ground – which would increase supply. The other is how willing we are in the future to save on our lifestyles – holidays and restaurants, for instance – and spend more of our incomes on housing.”
“Many US economists believe planning restrictions are responsible for high property prices,” says Miles. “But our research suggests if we could return to similar rates of improvement in transport infrastructure that we saw from 1850 to 1950, we could make a big difference to the evolution of prices in the future.
“But if transport doesn’t improve and commuting times remain the same, if future generations don’t want to live in high towers or underground and they’re still willing to sacrifice lifestyles to afford the kind of house their parents or grandparents lived in, then we can expect housing to become ever more expensive.”
Read the study
Download the paper 'Houses across time and space' by Professor David Miles and Professor James Sefton from the Centre for Economic Policy website.
David Miles is Professor of Financial Economics and James Sefton is Professor of Economics, both at Imperial College Business School.