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UK house prices and three decades of decline in the risk‑free real interest rate

Author

Listed:
  • David Miles

    (Bank of England and Imperial College London)

  • Victoria Monro

    (Bank of England)

Abstract

Real house prices in the UK have almost quadrupled over the past 40 years, substantially outpacing real income growth. Meanwhile, rental yields have been trending downwards — particularly since the mid‑90s. This paper reconciles these observations by analysing the contributions of the drivers of house prices. It shows that the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk‑free interest rate observed over the period. This is slightly offset by net increases in home‑ownership costs from higher rates of tax. Changes in the risk‑free real rate are a crucial driver of changes in house prices — the model predicts that a 1% sustained increase in index‑linked gilt yields could ultimately (ie in the long run) result in a fall in real house prices of just under 20%.

Suggested Citation

  • David Miles & Victoria Monro, 2019. "UK house prices and three decades of decline in the risk‑free real interest rate," Bank of England working papers 837, Bank of England.
    • Handle: RePEc:boe:boeewp:0837
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    References listed on IDEAS

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    1. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
    2. Harding, John P. & Rosenthal, Stuart S. & Sirmans, C.F., 2007. "Depreciation of housing capital, maintenance, and house price inflation: Estimates from a repeat sales model," Journal of Urban Economics, Elsevier, vol. 61(2), pages 193-217, March.
    3. Matthew Rognlie, 2015. "Deciphering the Fall and Rise in the Net Capital Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 1-69.
    4. Matthew Rognlie, 2015. "Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 1-69.
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    Cited by:

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    2. Geoffrey Meen & Alexander Mihailov & Yehui Wang, 2022. "On the long-run solution to aggregate housing systems," Urban Studies, Urban Studies Journal Limited, vol. 59(1), pages 178-196, January.
    3. Miles, David, 2023. "Macroeconomic impacts of changes in life expectancy and fertility," The Journal of the Economics of Ageing, Elsevier, vol. 24(C).
    4. Mikhail Stolbov & Maria Shchepeleva, 2023. "Sentiment-based indicators of real estate market stress and systemic risk: international evidence," Annals of Finance, Springer, vol. 19(3), pages 355-382, September.
    5. S. Belgin Akçay & Mert Akyüz, 2024. "Why Did House Prices Go Up During COVID-19 Pandemic? Policy-Driven or Market-Driven?," International Real Estate Review, Global Social Science Institute, vol. 27(2), pages 303-328.
    6. Daniel Dieckelmann & Hannah S. Hempell & Barbara Jarmulska & Jan Hannes Lang & Marek Rusnák, 2025. "House prices and ultra-low interest rates: exploring the nonlinear nexus," Empirical Economics, Springer, vol. 68(3), pages 1001-1037, March.
    7. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2024. "Housing, Distribution, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 981-1020, August.
    8. Chunmei Xu & Yan Kong, 2024. "Random forest model in tax risk identification of real estate enterprise income tax," PLOS ONE, Public Library of Science, vol. 19(3), pages 1-16, March.
    9. Peter Levell & David Sturrock, 2026. "How do house prices affect social mobility?," IFS Working Papers W26/02, Institute for Fiscal Studies.
    10. zu Ermgassen, Sophus O.S.E. & Drewniok, Michal P. & Bull, Joseph W. & Corlet Walker, Christine M. & Mancini, Mattia & Ryan-Collins, Josh & Cabrera Serrenho, André, 2022. "A home for all within planetary boundaries: Pathways for meeting England's housing needs without transgressing national climate and biodiversity goals," Ecological Economics, Elsevier, vol. 201(C).
    11. Cep Jandi Anwar & Stephen G Hall & Nermeen Harb & Indra Suhendra & Eka Purwanda, 2023. "Evaluation of central bank independence, macroprudential policy, and credit gap in developing countries," PLOS ONE, Public Library of Science, vol. 18(5), pages 1-15, May.
    12. Chunhui Liu & Yaqi Yuan & Xiaoming Qi, 2024. "Who Cashed the Rent Gap? An Alternative Narration of a Shantytown Renovation Project in Nanjing, China," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 115(1), pages 112-125, February.

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    Keywords

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    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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