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Are mortgage lenders guilty of the housing bubble? A UK perspective

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  • Qin Xiao
  • Steven Devaney

Abstract

Existing theoretical models of house prices and credit rely on continuous rationality of consumers, an assumption that has been frequently questioned in recent years. Meanwhile, empirical investigations of the relationship between prices and credit are often based on national-level data, which is then tested for structural breaks and asymmetric responses, usually with subsamples. Earlier author argues that local markets are structurally different from one another and so the coefficients of any estimated housing market model should vary from region to region. We investigate differences in the price–credit relationship for 12 regions of the UK. Markov-switching is introduced to capture asymmetric market behaviours and turning points. Results show that credit abundance had a large impact on house prices in Greater London and nearby regions alongside a strong positive feedback effect from past house price movements. This impact is even larger in Greater London and the South East of England when house prices are falling, which are the only instances where the credit effect is more prominent than the positive feedback effect. A strong positive feedback effect from past lending activity is also present in the loan dynamics. Furthermore, bubble probabilities extracted using a discrete Kalman filter neatly capture market turning points.

Suggested Citation

  • Qin Xiao & Steven Devaney, 2016. "Are mortgage lenders guilty of the housing bubble? A UK perspective," Applied Economics, Taylor & Francis Journals, vol. 48(45), pages 4271-4290, September.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:45:p:4271-4290
    DOI: 10.1080/00036846.2016.1156231
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    References listed on IDEAS

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    1. Michael D. Bordo & John Landon-Lane, 2014. "What Explains House Price Booms? History and Empirical Evidence," International Symposia in Economic Theory and Econometrics, in: Macroeconomic Analysis and International Finance, volume 23, pages 1-36, Emerald Group Publishing Limited.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    3. Greiber, Claus & Setzer, Ralph, 2007. "Money and housing: evidence for the euro area and the US," Discussion Paper Series 1: Economic Studies 2007,12, Deutsche Bundesbank.
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    2. Marco Raberto & Bulent Ozel & Linda Ponta & Andrea Teglio & Silvano Cincotti, 2019. "From financial instability to green finance: the role of banking and credit market regulation in the Eurace model," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 429-465, March.

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