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How do buy-to-let investors affect housing price dynamics? I develop a structural search model that allows housing owners to invest in rental housing, and let rents be determined endogenously. To motivate the model, I present empirical evidence that a significant share of buyers are buy-to-let investors, and rents and the buy-to-let share are positively correlated with housing prices. The calibrated model matches the high investor share and housing price increase of a housing boom. A buy-to-let sector in a search framework is able to explain much of the observed increase in price-to-rent ratio, without shocks to credit or over-optimistic expectations. Buy-to-let introduces two mechanisms that increase prices compared to a standard search model. First, the endogenous correlation of rents and housing prices makes it attractive for non-owners to buy in “hot” markets, to avoid paying high rents. Second, the increased incentives to become landlords in high rent periods further increase the number of buyers and amplify the effect of high demand on housing prices. |
