London’s Housing Crisis; A perspective based on the role of financial markets and the UK’s economic growth model

In London, the gap between house prices and incomes has been continuously widening over the past few decades. In the vast literature on this topic, relatively little attention has paid to the demand side, and in particular, the role of unregulated investment demand. We argue that this demand is fuelled by the mortgage market, and encouraged implicitly by government policies, as a growth model for the UK economy through housing equity withdrawal, and as a privatised pension provision strategy. The financial industry, left at its own devices to create and allocate money in the form of debt in line with its short-term remit of maximising stakeholder value, issues loans and allocates it towards the highest expected return-to-risk ratio. The intrinsically low risk of housing mortgages gives housing a permanent advantage in absorbing credit, if remained unregulated. This allocation, besides being undemocratic, is not in the long-term interest of economic stability and equality. In this paper, we present an initial model built on existing literature and statistical data that serves as a first step towards an integrated model of London’s house price dynamics since 1980, with a particular focus on the role of the financial markets. The model, even though at an early stage, shows promise in endogenously replicating past trends in some variables key to the current housing crisis. A more comprehensive qualitative model is also presented in the form of a causal loop diagram, which will be the basis of further refinement of the formal quantitative model.