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It is not uncommon to hear someone complaint about the impact of buy-to-let investment on the costs of living. It is alleged to affect not only house prices themselves, but also prices at which these properties are then rented out in the private market. Consider this editorial in The Guardian, which argues that "Landlords ought to be tackled in any solution to Britain’s housing crisis":

Where do the very wealthiest spend their cash? One place is housing, for which there is a low level of stock being released on to the market. The result is rising house prices. Over the past 12 months, asking prices have gone up by 9.5%. This has a knock-on effect for renters. UK rents rose by 8.3% in the last three months of 2021.

I think the claim that speculation can lead to increase in the price of an asset class is not particularly controversial, nor that the property market is seen as a safe haven by people with savings to invest. However, I do wonder if there is any strong evidence to suggest that increase in the value of the asset should automatically translate to the increase of income derived from this asset.

I suppose it is plausible: one could imagine that by buying houses at a frenzy, landlords deprive the public of the potentially cheaper option of owning a house and drive would-be homeowners towards renting. Then they set rents high so that they can cover their high mortgage payments while still making a profit.

But I would also speculate that this strategy shouldn't work. The market is awash with existing landlords who own houses outright or bought them when prices were lower, therefore have lower mortgage payments and could, should they so choose, offer lower rents. If the demand for rental properties wasn't as strong as it is, the landlords whose costs are cheaper could undercut the ones that are buying and letting properties at current high prices, making the latter's investment unsustainable, leading to a fall in property prices. Therefore I would reason that rents are primarily driven by market forces other than property prices (such as job opportunities in the area vs supply of houses) and these lucrative rents are then the bigger part of what makes investment in property attractive.

But this is all speculative. Is there any research that has attempted to disentangle the cause and effect relationship between rents, property prices, and buy-to-let investment?

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There is substantial literature on the topic. In general terms, the relationship between Rent and Price often appears in literature. For specific studies for real estate markets, you can explore these two papers and their references:

  1. The Long-Run Relationship between House Prices and Rents

  2. Relationship between Price and Rent in the Real Estate Market and Stability Analysis: A Theoretical Approach

On your observations, I have few points to make:

You are distinguishing about ppl who can buy a house for investment and those who cannot buy but can take on rent. You are indirectly making assumption about frictions in the credit market.

If there are no frictions then too high rent will encourage the renters to take loan and buy the house and pay EMI, as it might be more profitable now. If rents are too low more ppl will exit from buying and take on rent instead. Ultimately equilibrium will be achieved.

Your argument about landlords who bought in the past is sound but again a small point. You have again made an implicit assumption that interest rates are not flexible. In flexible interest rates the EMI will go up for everyone.

The main argument of the article, I think, should be that when there are not better alternative investment opportunities for wealthiest then start speculative investment in housing driving prices up. This does increase EMI for non-owners who might have to now shift to renting. As more and more shift to renting, rents will go up. Even if interest rates were fixed there will be some impact nevertheless as not all the upcoming demand can be met by all the previous owners.

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