Buy to Let: The Role of Investors in Housing Booms

Abstract

How do rental markets affect housing price dynamics? I develop a structural search model that allows housing owners to invest in rental housing, and let rents be determined endogenously. To motivate the model, I present empirical evidence that around 20 percent of buyers are buy-to-let investors, and the buy-to-let share is positively correlated with housing prices. The calibrated model matches the high investor share and housing price increase of a housing boom. A buy-to-let sector in a search framework is able to explain 50 percent of the observed increase in price-to-rent ratio, without shocks to credit or over-optimistic expectations. In the model, an exogenous increase in population inflow increases demand for both owned and rented housing. Increased rental demand induces more buy-to-let investors to enter the market, which adds extra demand to the housing market. The investor mechanism is novel to this paper. Search frictions are important to explain the increase in price-to-rent ratio.

Keywords: Housing, Buy-to-Let, Housing Investors, Housing Booms

JEL Classification: D83, R21, R31