Lai, Hang; (2025) Essays on Economic Mechanisms of the UK Housing Market. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis examines how three interconnected economic mechanisms impact the UK housing market. At its foundation lies the valuation mechanism - how market participants assess future housing benefits through discount rates. This valuation process then influences how policy interventions affect market behavior and ultimately determines how housing investments generate returns. The research begins by examining the fundamental valuation mechanism, analyzing leasehold and freehold price differences using a unique dataset combining HM Land Registry property transaction dataset with detailed property characteristics in the Registered Lease dataset. This analysis provides new evidence on the term structure of discount rates over very long time, addressing measurement challenges that have limited previous research while providing insights into how market participants value future benefits. This valuation mechanism act as the foundation to understand both the housing policy transmission and housing return generation. Building on this valuation framework, the second analysis examines how policy interventions affect market behavior through the study of the 2016 Buy-to-Let (BTL) 3% tax surcharge. Using a difference-in-differences methodology, the second analysis examine the policy impacts based on the comprehensive transaction data and leasing data. The findings show that the policy led to a 6% increase in rent and a 25% increase in time-on-market (TOM) for rental properties. The research reveals evidence of speculative behavior before policy implementation and demonstrates how tax burden is transferred to tenants through multiple channels. The findings indicate how market participants react to the policy change based on their valuation about the future costs and benefits. The third analysis shows how the valuation and policy responses ultimately reflect in the total housing returns. Using matched rental and price data for 265,052 properties across England to examine return generation in residential rental housing. The study finds England average annualized capital gains of 2.2% and net income yields of 3.0%, with significant regional variations. London shows the lowest total returns at 4.5%, while higher-priced properties demonstrate stronger capital appreciation but lower rental yields. These patterns reflect the interaction between fundamental valuation decisions and policy induced market changes. The thesis makes several significant contributions to both academic literature and practical application. It provides new empirical evidence on long-term discount rates, extending previous theoretical work on housing market valuation. It demonstrates how policy transmission depends on the underlying valuation of the market participants. It develops new methodological approaches for measuring housing returns, addressing measurement challenges identified in recent literature. Most importantly, it shows how these mechanisms work together: valuation patterns shape policy responses, while policy interventions and valuation of market participants affect the total return generation of housing. The research has substantial practical implications, informing current policy debates on the leasehold reform and investment practices especially in residential and rental property. The findings regarding unintended consequences, speculative behaviours, and market adjustment patterns provide valuable guidance for policy design. In short, this comprehensive examination of housing market mechanisms contributes to both theoretical understanding and practical application, offering insights for policy design and investment strategy while suggesting new approaches to analyzing housing market dynamics.

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