Spillovers, Contagion, and Interconnectedness of Local Housing Markets across the UK

Periods of high volatility in house prices increasingly occur synchronously in the housing markets of different countries and also at a disaggregated level within countries. Such contagion, or volatility spillovers are often captured by ARCH type. While many studies have examined international patterns in house price movements or considered regional housing market relationships, relatively few have researched how house prices diffuse over local housing markets. In this paper we employ data at local authority level in the UK for major cities and their surrounding areas to examine not only potential connectedness between cities but particularly focusing on price diffusion and spillovers between cities and their neighbouring local authority areas as well as considering price leadership and the ripple effect, or contagion. Specifically, we examine volatility spillovers between housing markets in different local authority areas following Diebold and Yilmaz (2014). Our analysis will permit a dynamic analysis as over time, any local authority can be both a net transmitter and a net receiver of shocks. Furthermore, Attanasio et al., (2009) noted that there may be some form of common causality that links regions therefore leading to significant correlations. This may be prevalent at a more disaggregated level and linking to previous studies on ripple effects (Meen, 1990, 1999), may imply contagion spreading from leading housing market areas to followers. In this paper we test for contagion between housing markets using house price data from the local authorities. We consider different approaches such as extreme value theory and ARCH based models.