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Modelling structural change in the UK housing market: A comparison of alternative house price models

  • Pain, Nigel
  • Westaway, Peter

This paper develops a new approach to the determination of house prices, with housing demand being conditioned directly on consumers' expenditure rather than the determinants of expenditure. We obtain estimates of the long-run demand for housing condition which relates the marginal rate of substitution between the consumption of housing services and the consumption of goods to the real user cost of housing. House prices are assumed to adjust so as to clear the housing market. Conditioning on consumption ensures that the permanent income measure used in determining the level of consumption is consistently reflected in housing demand, so that consumption of goods and housing services cannot diverge indefinitely. It also ensures that the effects of financial liberalisation on the relative consumption of housing and non-housing goods and services can be estimated separately from its common influence on their level. These effects are captured using the average loan-value ratio for first-time buyers. Our model is tested on UK data from 1968 to 1994. The proposed model is found to have structurally stable parameters across both the housing boom of the late 1980s and the recent housing market downturn. Statistical comparisons with the more conventional models in use at HM Treasury and the Bank of England during the early 1990s provide additional evidence in favour of our proposed approach.

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File URL: http://www.sciencedirect.com/science/article/B6VB1-3SWSHHG-8/2/908f949b6247c9138d3878f5a6819239
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 14 (1997)
Issue (Month): 4 (October)
Pages: 587-610

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Handle: RePEc:eee:ecmode:v:14:y:1997:i:4:p:587-610
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Ericsson, Neil R., 1992. "Cointegration, exogeneity, and policy analysis: An overview," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 251-280, June.
  2. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
  3. Gordon Fisher & Michael McAleer, 1981. "Alternative Procedures and Associated Tests of Significance for Non-Nested Hypotheses," Working Papers 420, Queen's University, Department of Economics.
  4. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
  5. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-64, March.
  6. Meen, Geoffrey P, 1990. "The Measurement of Rationing and the Treatment of Structural Change in the UK Mortgage Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(2), pages 167-87, April-Jun.
  7. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
  8. Miles, David K, 1993. "House Prices, Personal Sector Wealth and Consumption: Some Conceptual and Empirical Issues," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 35-59, Suppl..
  9. MacKinnon, James G, 1992. "Model Specification Tests and Artificial Regressions," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 102-46, March.
  10. F J Breedon & M A S Joyce, 1993. "House prices, arrears and possessions: A three equation model for the UK," Bank of England working papers 14, Bank of England.
  11. repec:nsr:niesrd:15 is not listed on IDEAS
  12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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