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Bubbles in UK house prices: evidence from ESTR models

Author

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  • David McMillan
  • Alan Speight

Abstract

Recent movements in stock and house prices have led to an examination of the presence of bubbles. Whilst, there is extensive research on stock price data, there is relatively less for house prices. This paper uses a present-value model for house prices to test for the presence of bubbles. The results support the presence of a non-fundamental component within UK national and regional house prices. In particular, for the majority of series considered, evidence is presented of linear non-stationarity within the fundamental present-value relationship, and of non-linear stationarity, implying the presence of a non-fundamental, or bubble, component. Furthermore, evidence is presented that prices adjust quicker when they are below fundamental equilibrium, than when they are above fundamental equilibrium, i.e. there is downward price stickiness. These results support the hypothesis that house price dynamics can be characterised by price-to-price momentum. Finally, forecast evidence suggests that real prices are likely to adjust downwards and converge with fundamental value.

Suggested Citation

  • David McMillan & Alan Speight, 2010. "Bubbles in UK house prices: evidence from ESTR models," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(4), pages 437-452.
  • Handle: RePEc:taf:irapec:v:24:y:2010:i:4:p:437-452
    DOI: 10.1080/02692171.2010.483785
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    References listed on IDEAS

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    1. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
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    Cited by:

    1. Montagnoli, Alberto & Nagayasu, Jun, 2015. "UK house price convergence clubs and spillovers," Journal of Housing Economics, Elsevier, vol. 30(C), pages 50-58.
    2. Nagayasu, Jun, 2016. "Inflation and Bubbles in the Japanese Condominium Market," MPRA Paper 71192, University Library of Munich, Germany.
    3. Alberto Montagnoli & Jun Nagaysu, 2013. "An investigation of housing affordability in the UK regions," Working Papers 1316, University of Strathclyde Business School, Department of Economics.

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