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UK housing bubble case study analysis: The ‘‘behaviour’’ of UK housing bubbles and the ‘‘affordability’’ parameter

Listed author(s):
  • Charalambos Pitros
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    Purpose – The economic, political and social significance of housing bubbles is enormous. Since the mid-1980s, the UK housing markethas experienced two succeeding bubble-bust cycles, in the periods 1985/6-1989 and 2001/2-2007. These bubbles differed both in lengt and in how they ended. However, the affordability benchmarks behaved in almost exactly the same way in both cases. The majority of authors identify two ways in which a bubble can end (i.e. after the bust 'end regimes'): prices could crash suddenly, in a relativel short period of time or can move in a transition to another regime, such as slow deflation. The aim of this paper is to adjust this theory and to examine whether and why the way a housing bubble stops growing (i.e. 'growth-end regimes') affects its length, how afordability may be relevant to this and whether housing affordability can guide our investments decisions. Design/methodology/approach – The methodology focuses on cross-case analysis of the above two UK housing bubbles, using research methods such as literature review, historical analysis, regression-correlation analysis, normality tests and quality control charts. Findings – The findings reveal that the way a housing bubble ends is inherently related with affordability and that can also largely explain its length. Moreover, certain rates of housing affordability can generate a simple core theory for optimal investment decision-making in the UK housing market. Originality/value – This is the first study that examines whether the way a housing bubble stops growing affects its length and how affordability can guide our investments decisions. The paper also presents a novel use of quality control charts in the UK housing market. The results of this study can shed light on the extent to which theories of bubble end-regimes and affordability indices can offer better investment information. This paper will help real estate researchers, professionals (appraisers) and individual mortgage borrowers to better understand the nature of housing investment, thus contributing by reducing stress in the residential housing market.

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    Paper provided by European Real Estate Society (ERES) in its series ERES with number eres2014_4.

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    Date of creation: 01 Jan 2014
    Handle: RePEc:arz:wpaper:eres2014_4
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    1. Bruce K. Gouldey & Clifford F. Thies, 2012. "Asset Bubbles and Supply Failures: Where Are the Qualified Sellers?," Cato Journal, Cato Journal, Cato Institute, vol. 32(3), pages 513-538, Fall.
    2. Gadi Barlevy, 2007. "Economic theory and asset bubbles," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-59.
    3. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
    4. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
    5. Petr Geraskin & Dean Fantazzini, 2013. "Everything you always wanted to know about log-periodic power laws for bubble modeling but were afraid to ask," The European Journal of Finance, Taylor & Francis Journals, vol. 19(5), pages 366-391, May.
    6. Donald L. Lerman & William J. Reeder, 1987. "The Affordability of Adequate Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(4), pages 389-404.
    7. Gan, Quan & Hill, Robert J., 2009. "Measuring housing affordability: Looking beyond the median," Journal of Housing Economics, Elsevier, vol. 18(2), pages 115-125, June.
    8. Patricia Fraser & Martin Hoesli & Lynn McAlevey, 2008. "House Prices and Bubbles in New Zealand," The Journal of Real Estate Finance and Economics, Springer, vol. 37(1), pages 71-91, July.
    9. John M. Quigley & Steven Raphael, 2004. "Is Housing Unaffordable? Why Isn't It More Affordable?," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 191-214, Winter.
    10. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    11. Angela Black & Patricia Fraser & Martin Hoesli, 2006. "House Prices, Fundamentals and Bubbles," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9-10), pages 1535-1555.
    12. N. Lesca, 2010. "Introduction," Post-Print halshs-00640602, HAL.
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