Home away from home? Foreign demand and London house prices

What explains house price variation in global cities like London and New York? A widely-held view is that foreign demand, especially during crises, is part of the explanation, but the rarity of crises renders pure time-series methods ineffective at evaluating this explanation. Our new approach is based on the insight that foreigners exhibit “home bias abroad,”concentrating demand in particular areas within global cities. Using the approach on large databases of housing transactions in London over two decades, we find that foreign risk strongly affects house prices and transactions volumes. The effects are long-lasting but temporary, and vary interestingly across countries. ∗The previous version of this paper was circulated under the title "Preferred Habitats and SafeHaven Effects: Evidence from the London Housing Market". We gratefully acknowledge Nationwide Building Society and the Land Registry for providing us with access to the data, and the Alfred P. Sloan Foundation for financial support. We thank John Campbell, Stefano Giglio, Cam Harvey, Ralph Koijen, Kevin Sheppard, Florencio Lopez-de-Silanes, John Muellbauer, Philipp Schnabl, seminar and conference participants at the Saïd Business School, the Oxford-Man Institute of Quantitative Finance, the Oxford Department of Economics, Goethe University, the MIT Sloan Finance Seminar, the Dutch National Bank, the Duisenberg Institute of Finance, Cass Business School, the IMF, Imperial College, Darden School of Business, the NBER Asset Pricing Program Meeting, and the Paul Woolley Centre Conference at the LSE for useful comments, and Job Boerma and Shuang Zheng for dedicated research assistance. †Badarinza: Saïd Business School and Oxford-Man Institute of Quantitative Finance, University of Oxford, Park End Street, Oxford OX1 1HP, UK. Email: [email protected]. Ramadorai: Saïd Business School, Oxford-Man Institute of Quantitative Finance, University of Oxford, Park End Street, Oxford OX1 1HP, UK, and CEPR. Email: [email protected].