The London Housing Market: A System Dynamics Analysis
80 Pages Posted: 22 Mar 2023
Date Written: March 16, 2023
Economic models of housing markets have struggled to explain persistent cycles in house prices, housing supply and housing finance, in particular in major cities. Housing markets are complex systems and standard equilibrium-based models may not be well equipped to capture the role of feedback loops in generating endogenously driven cyclical behaviour. We develop a novel quantitative system dynamics model to explain long-term developments in London’s housing market from 1980-2020, calibrated with existing data and incorporating thousands of feedback loops between key endogenous and exogenous stock and flow variables. The model reproduces the salient features of the London housing market’s past behaviour, such as the rapid growth in prices and mortgage credit relative to incomes and boom-bust cycles. Extending the simulation into the future under a ‘business-as-usual’ policy framework continues to generate exponential house price growth and large- amplitude oscillations. We also show the model can be used for scenario modelling of different housing policy interventions. These findings suggest more attention should be paid to feedback loops between housing finance, prices and supply-side dynamics and the institutions and policy frameworks that encourage such dynamics.
Keywords: housing economics; house prices; housing markets; regional housing markets; housing finance; housing supply, financial cycles; system dynamics; London
JEL Classification: R21; R31; R38; R51; R52; R58; E51; B26; E44; G21
Suggested Citation: Suggested Citation