THE IMPACT OF IMMIGRATION ON HOUSE PRICES IN LOCAL AREAS
A 1% increase in the number of immigrants in a local community leads to a 1.6% fall in
house prices. This is because the wealthiest in the community tend to move elsewhere,
reducing demand for houses in that area.
That is the main finding of the first study to examine the effect of immigration on house
prices in the UK. Filipa Sá will present her research at the Royal Economic Society’s
2012 annual conference.
There has been a well-publicised rise in both immigration and house prices in the UK
over the last 20 years, with immigrants now accounting for 12% of the working-age
population and house prices more than doubling. This has led many to suggest that the
rise in immigration has been a cause of rising house prices.
But by looking at immigration data from the UK Labour Force Survey and house price
data from the Land Registry, the study finds that a rise in the number of immigrants to
1% of the local population leads around 0.9% of the local population to move
elsewhere.
These tend to be the highest earners while the new immigrants tend to be paid below
the average wage of the area. This reduction in the overall income of the community
reduces the demand for houses in that area, lowering their prices.
The author stresses that the effect depends on local people moving out and does not
mean that prices across the country are lower, only in the areas where there are a lot of
immigrants. The study also finds that the negative effect of immigration on house prices
only occurs in areas where the general level of education of the immigrants is low.
In areas where immigrants tend to be better educated, for example the City of London,
their higher wages counteract the effect of locals leaving and may actually lead to a rise
in house prices.
More…
Immigration into a local authority in the UK leads to native out-mobility and has a
negative effect on local house prices. This is the central finding of new research by
Filipa Sá of the University of Cambridge, to be presented at the Royal Economic
Society’s 2012 annual conference.
Combining immigration data from the UK Labour Force Survey with house price data
from the Land Registry, this study finds that:

Natives respond to immigration by moving to different areas and those who
leave are at the top of the wage distribution.

This generates a negative income effect on housing demand and pushes down
house prices.

In particular, an inflow of immigrants equal to 1% of the local population reduces
house prices by 1.6%.

The negative effect of immigration on house prices is driven by local areas
where immigrants have lower education.
This is the first study to examine the impact of immigration on house prices in the UK. It
shows that the impact crucially depends on the mobility response of natives.
There has been a significant increase in both immigration and house prices in the UK in
recent years. Until the mid-1990s, immigrants accounted for less than 8% of the
working age population in the UK. Today, they account for more than 12%. At the same
time, average house prices have grown from just over £60,000 in 1995 to over
£160,000 in 2010.
This figure suggests correlation between immigration and house prices, but does not
imply causality. Using data for England and Wales disaggregated by local authority, this
study examines the effect of immigration on house prices and highlights the channels
through which this effect takes place.
The sign and magnitude of the effect of immigration on house prices is theoretically
ambiguous. In principle, immigrant inflows would increase the demand for housing.
Combined with an upward-sloping housing supply, this would lead to an increase in
house prices and rents.
But immigration may be associated with offsetting native out-migration. If the offset is
complete, the local population would remain constant. In this case, housing demand
may still be affected if the change in composition of the local population leads to a
change in local income. This would affect housing demand and house prices via an
income effect.
The empirical results suggest that immigration has a negative effect on house prices.
An inflow of immigrants equal to 1% of the local population reduces house prices by
1.6%.
A simple theoretical model and empirical estimates of native population growth and
mobility suggest that one explanation for this negative effect is the mobility response of
natives. The estimates show that an immigrant inflow equal to 1% of the local
population leads to a native outflow equal to 0.849% of the local population and
increases the native out-migration rate by 0.132 percentage points.
Looking at the wage distribution of the local population, the study finds that local areas
with high immigration tend to be at the bottom of the wage distribution. This is mostly
due to the fact that natives have lower wages in high immigration cities.
This finding can be explained by two factors. First, there is some evidence that
immigration has a negative effect on native wages at the lower end of the wage
distribution. Second, natives who leave the city are at the top of the wage distribution.
This generates a negative income effect on housing demand and pushes down house
prices in local areas where immigrants cluster.
Behind these overall effects, there are some important differences depending on the
level of education of the local immigrant population. The negative effect of immigration
on house prices is driven by areas where the share of immigrants with lower education
is high.
A possible explanation is that in local areas where immigrants are more educated (and
hence have higher wages) immigration exerts a positive income effect on housing
demand that counteracts the negative income effect from native out-mobility.
ENDS
‘Immigration and House Prices in the UK’ by Filipa Sá
Filipa Sá is a Fellow and Lecturer at Trinity College, University of Cambridge and a
Research Fellow at the Institute for the Study of Labor (IZA), Bonn
Contact:
Filipa Sá
Email: fgs22@cam.ac.uk