Easy credit or housing shortages can''t explain why prices kept rising
The supply of or demand for housing cannot explain the sustained rise in British property prices since the 1980s, according to a study by Alisa Yusupova, to be presented at the Royal Economic Society''s annual conference at the University of Bristol in April 2017.
The research tracks the movement of house prices from the late 1980s to the mid-2000s, and finds that neither demand-side factors such as household income, mortgage rates and credit availability, or the supply of new houses explain price rises during some of that period. Instead, according to the UK Housing Observatory, which is running the research project of which this study is a part, there seems to have been a succession of speculative ''house price exuberance'' bubbles rippling out from London.
''Our findings highlight the inadequacy of widely-used empirical models to explain movements in house prices'', the author concludes. ''But they also illustrate how new statistical methods can help us improve our understanding of the causes of fluctuations in house prices.''
This paper analyses the behaviour of regional real estate markets in the UK over the last four decades. We find that a comprehensive model of housing that includes demand side factors such as household income, mortgage rates, credit availability, demographics, inflation as well as supply side factors such as supply of new houses relative to the growth in working age population, and regional spillover effects, cannot fully capture house price dynamics in certain periods of the sample.
In particular, the analysis demonstrates that economic fundamentals fail to explain the behaviour of UK regional property prices in the late 1980s and mid-2000s. Interestingly, during these time periods, prices exhibited explosive dynamics, which is in accordance with speculative bubbles in housing markets.
By examining in detail the timeline of price dynamics, we demonstrate that there was a synchronisation of explosive episodes across regional housing markets, leading to house price exuberance at the national level.
Further, we show that the pattern of propagation is consistent with the notion of the so-called ripple effect. Specifically, house price exuberance emanated from Greater London and spread out northward, affecting neighbouring regions with a time lag.
On the one hand, our findings highlight the inadequacy of widely-used empirical models to explain movements in house prices, and, on the other hand, they illustrate how new statistical methods can help us improve our understanding of the causes of fluctuations in house prices.
By doing so, they facilitate the development of better monitoring mechanisms and the design of more effective and proactive policies. This is particularly relevant for international organisations and central banks that, following the last financial crisis, closely monitor developments in housing markets.
For example, the International Monetary Fund established the Global Housing Watch and the Federal Reserve Bank of Dallas created the International House Price Database. With regards to the UK, most notably, the Bank of England, concerned over systemic risks, created the Financial Policy Committee.
Exuberance in UK Housing Markets – Dr Alisa Yusupova
This paper is part of a wider research project – the UK Housing Observatory – which deals with real-time monitoring and forecasting of UK real estate markets both at the national and regional level.
The project output is publically available at http://www.lancaster.ac.uk/lums/housing/ and includes quarterly-updated indicators of house price exuberance and also the most comprehensive publicly available set of forecasts of house price growth for 1, 2, 3 and 4 quarters ahead for the national as well as regional markets in the UK.