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The 2007 financial crisis and the UK residential housing market: Did the relationship between interest rates and house prices change?

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  • Tse, Chin-Bun
  • Rodgers, Timothy
  • Niklewski, Jacek
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    Abstract

    This paper investigates the impact of the 2007 financial crisis on the relationship between real mortgage interest rates and real house prices. It applies a dynamic conditional correlation based methodology that uses fractionally differenced data along with controls for structural breaks and non-interest-rate related factors that influence house prices. The key finding made is that the financial crisis had a long-term structural impact on the monetary transmission relationship. For example, we find that the mean conditional correlation between house prices in England and Wales and the three-year fixed mortgage rate rose by 6.6 percentage points. Similarly, the mean correlation between prices and the standard variable mortgage rate increased 6.4 percentage points to 54%. These findings suggest to us that interest-rate-based monetary policy still has an important role to play in the housing market.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 37 (2014)
    Issue (Month): C ()
    Pages: 518-530

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    Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:518-530

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Financial crisis; Residential housing market; Conditional correlation; Transmission mechanism;

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