Population and house prices in the United Kingdom

Real house prices rise in the United Kingdom amid growing concern of an impending
correction. The rate of household formation has increased with strong population growth,
due to elevated rates of natural increase and net migration, and lack of growth in
average household size, due to a rise in single-person households with population
ageing. This paper presents an overlapping generations model of housing, endogenous
labour, savings and growth to analyse the effect of an increase in the household
formation rate and speculative demand under rational expectations on house prices in a
general equilibrium. We find that real house prices rise over time if the rate of household
formation outstrips the rate of housing supply, but do not follow a speculative bubble
path in the long run. The results explain why the upward trend in real house prices
reflects market fundamentals and has continued despite population ageing as the
number of working and retired households grows relative to the number of older people
seeking to sell.