First-Time Buyers Lead The Owner-Occupied Housing Market

Owner-occupiers tend to spend longer searching for a potentially successful housing chain than either first-time buyers or sellers of new housing. As a result, prices recorded for successful transactions in the first-time buyer and newly-built dwelling sectors of the housing market tend to move ahead of prices in the existing owner-occupier sector. That is the finding of Leslie Rosenthal of the University of Keele in an article published in the latest issue of the Economic Journal.

Rosenthal notes that commonly held views on the housing market often concern some parts of the market acting ahead of other sectors. One such belief concerns the first-time buyer market, which is thought to move some time before the established, existing owneroccupier housing sector does. A similar belief concerns the ”regional ripple”, whereby prices in the South-East and London housing markets are thought to move first, followed by the large Midlands and Northern regions some weeks later. Rosenthal develops a model of how owner-occupied housing chains form, which may explain why first-time buyers and thriving regions might lead ahead of other sectors of the housing market. He begins by reproducing the way that housing chains slowly and painfully build up over a number of periods and then very quickly ”complete”.

This is a familiar story for anyone who has tried to buy or sell a dwelling. Before A can buy B’s dwelling, A must find a buyer for his or her dwelling, and so on. The chain will be completed, and final transactions made, if there is a buyer at one end of the chain who does not have a house that needs to be sold (a first-time buyer will do), and,
at the other end of the chain, a seller of a dwelling who does not wish to buy another dwelling (a builder of new dwellings will do). An indeterminate number of existing owneroccupiers can make up the middle of the chain.
Rosenthal produces a computer model that successfully mimics the way that housing chains build up over time. The simulated outcomes produce just the sort of chains that have been observed in the owner-occupied housing market. The outcomes also show that the existing owner-occupier will generally spend a longer time searching to be included in a successful housing chain than will either the first-time buyer or the seller of new housing. One implication of these findings is that prices recorded for successful transactions in the first-time buyer sector of the housing market will move before prices in the existing owner-occupier sector.

Rosenthal concludes with an examination of the existing data on house prices in the firsttime buyer sector, the existing owner-occupier sector and the newly-built dwellings sector, using building society sources. Analysis of the data confirms that first-time buyer prices and newly-built dwelling prices do tend to move ahead of the prices of existing owneroccupiers’ houses.

”Chain Formation in the Owner-Occupied Housing Market” by Leslie Rosenthal is published in the March 1997 issue of the Economic Journal. Rosenthal is at the University of Keele. His research was financially supported by the Economic and Social Research Council.

Leslie Rosenthal