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House prices, arrears and possessions: A three equation model for the UK


  • F J Breedon
  • M A S Joyce


The current slump in the UK housing market has coincided with record increases in mortgage arrears and possessions. Falling nominal house prices reduce the amount of unwithdrawn equity in housing and, under certain conditions, provide incentives for borrowers to accumulate arrears and for lenders to possess. However, possessions may themselves depress house prices. This paper attempts to analyse and quantify these interactions by estimating a three equation econometric model of UK mortgage arrears, possessions and house prices, in which expectations of future house prices are formed according to the rational expectations hypothesis. The model is simulated to examine the implications of interest rate changes and policies to reduce possessions.

Suggested Citation

  • 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.
  • Handle: RePEc:boe:boeewp:14

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    References listed on IDEAS

    1. Meen, Geoffrey P, 1990. "The Removal of Mortgage Market Constraints and the Implications for Econometric Modelling of UK House Prices," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(1), pages 1-23, February.
    2. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-138, March.
    3. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 729-752.
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    Cited by:

    1. Pain, Nigel & Westaway, Peter, 1997. "Modelling structural change in the UK housing market: A comparison of alternative house price models," Economic Modelling, Elsevier, vol. 14(4), pages 587-610, October.
    2. Janine Aron & John Muellbauer, 2010. "Modelling and Forecasting UK Mortgage Arrears and Possessions," Economics Series Working Papers 499, University of Oxford, Department of Economics.
    3. Gurdgiev, Constantin T., 2006. "Owner-occupied housing in a model of exchange rate determination," Journal of Housing Economics, Elsevier, vol. 15(3), pages 217-229, September.
    4. Irene de Greef & Ralph de Haas, 2002. "Housing Prices, Bank Lending, and Monetary Policy," Macroeconomics 0209010, EconWPA.
    5. Qingyu, Zhu, 2010. "Regional unemployment and house price determination," MPRA Paper 41785, University Library of Munich, Germany.
    6. Catarina Figueira & John Glen & Joseph Nellis, 2005. "A Dynamic Analysis of Mortgage Arrears in the UK Housing Market," Urban/Regional 0509006, EconWPA.
    7. Emilio Fernandez-Corugedo & Simon Price, 2002. "Financial liberalisation and consumers' expenditure: 'FLIB' re-examined," Bank of England working papers 157, Bank of England.
    8. Rinaldi, Laura & Sanchis-Arellano, Alicia, 2006. "Household debt sustainability: what explains household non-performing loans? An empirical analysis," Working Paper Series 570, European Central Bank.
    9. Brown, Jane P. & Song, Haiyan & McGillivray, Alan, 1997. "Forecasting UK house prices: A time varying coefficient approach," Economic Modelling, Elsevier, vol. 14(4), pages 529-548, October.
    10. Hany Guirguis & Christos Giannikos & Randy Anderson, 2004. "The US Housing Market: Asset Pricing Forecasts Using Time Varying Coefficients," The Journal of Real Estate Finance and Economics, Springer, vol. 30(1), pages 33-53, October.
    11. Barot, Bharat & Takala, Kari, 1998. "House prices and inflation : a cointegration analysis for Finland and Sweden," Research Discussion Papers 12/1998, Bank of Finland.

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