The big rise in UK house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in real risk-free interest rates over the period. This is slightly offset by net increases in home-ownership costs from higher rates of tax.

These are the findings of a new research report by David Miles of Imperial College London and Victoria Monro of the Bank of England. Their analysis predicts that a 1% sustained increase in index-linked gilt yields from current rates could ultimately result in a fall in real house prices of around 20%.