Reducing Investment Demand Key to Solving the UK's Housing Affordability Crisis

The government-commissioned report “The demand for housing as an investment: Drivers, outcomes and policy interventions to enhance housing affordability in the UK” written by Professor Josh Ryan-Collins of UCL’s Institute for Innovation and Public Purpose (IIPP), calls for major reforms to the UK's housing market to curb speculative investment demand and make homes more affordable.

Whilst both Conservative and Labour governments have emphasized the need to build more homes to solve the housing crisis, the report stresses that reforms to property taxes, mortgage markets, and the planning system to reduce the demand for housing as a financial asset are essential to tackling rising housing costs and improving access to affordable homes.

The report identifies the “housing-finance feedback cycle” as a key driver of rising house prices. This feedback loop involves increasing financial flows into housing, which generate price rises and create expectations of further appreciation, fuelling speculative demand for housing as an investment. This trend is particularly evident in buy-to-let properties and second homes, which now account for one in five homes in the UK, while homeownership for younger generations continues to decline.

Key Policy Recommendations:

1. Reforming Property Taxes: The report proposes replacing council tax and stamp duty with an annual property tax based on home value to discourage speculative investment.
2. Planning Reforms: Limiting the conversion of primary residences into rental units or second homes, and imposing restrictions on short-term holiday lets, is another key measure.
3. Social Housing Interventions: Local authorities and housing associations should be given the right of first refusal to purchase homes in areas of high housing need, converting them into affordable social housing.
4. Mortgage Market Reforms: Introducing compulsory mortgage insurance and offering longer-term fixed-rate mortgages for first-time buyers, while imposing stricter regulations on buy-to-let mortgages to limit speculative investment.

Professor Ryan-Collins stated,

“For the past 40 years, UK policies have treated housing as a financial asset rather than addressing the population’s actual housing needs. This has led to skyrocketing costs and left younger generations facing unaffordable home prices and high rents. To address this, we must make the existing housing stock more accessible by reducing speculative investment.”

The report illustrates how decades of housing and financial policies have shifted towards subsidising homeownership and investment, rather than ensuring affordable housing. Since the 1980s, liberalisation of mortgage markets and low interest rates have spurred significant financial flows into housing, driving real house prices up fivefold. This process, known as the "financialisation" of housing, has widened the gap between existing homeowners and first-time buyers.

The social consequences have been stark. Homeownership among younger generations has plummeted, with Millennials half as likely to own a home by age 30 compared to Baby Boomers. Meanwhile, private landlords now own one in five homes, while nearly half of UK adults own no property at all.

The report highlights the need for significant policy changes to make housing more affordable, stating that freeing up existing housing stock could have a more immediate impact than relying solely on new construction. By addressing the deep-rooted issues of speculative demand and prioritizing housing as a social good over financial gain, the UK could take a major step toward resolving its housing affordability crisis.

Read the report here and contact Josh Ryan-Collins, Professor of Economics and Finance at UCL IIPP for more information.  

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