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Is there long-run convergence of regional house prices in the UK?

  • Mark J. Holmes

    ()

    (University of Waikato)

  • Arthur Grimes

    ()

    (Motu Economic and Public Policy Research)

This paper investigates the long-run convergence of regional house prices in the UK. Using a variety of econometric methods, existing studies have failed to reach a consensus on whether or not regional house prices are cointegrated and exhibit long-run constancy relative to each other. We propose the application of a new test that combines principal components analysis with unit root testing to throw new light on the regional convergence debate. Using mix-adjusted quarterly house price data for 1973-2005, we find that existing unit root and cointegration methodologies indicate the presence of multiple stochastic trends with, at best, very weak evidence of long-run convergence. However, testing for the stationarity of the largest principal component based on regional house price differentials suggests that all UK regional house prices are driven by a single common stochastic trend and can be regarded as exhibiting strong convergence in the long-run. Further analysis suggests there is a high degree of persistence in regional house price differentials.

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Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 05_11.

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Length: 22 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:mtu:wpaper:05_11
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  1. Michael Artis & Anindya Banerjee & Massimiliano Marcellino, . "Factor forecasts for the UK," Working Papers 203, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," G.R.E.Q.A.M. 96a09, Universite Aix-Marseille III.
  3. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07.
  4. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  5. Mark J. Holmes & Kul B. Luintel, 1997. "The Regional Demand for Building Society Mortgage Finance," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 1(1), pages 65-81, Summer.
  6. Ashworth, John & Parker, Simon C, 1997. "Modelling Regional House Prices in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 44(3), pages 225-46, August.
  7. Hall, Stephen & Lazarova, Stepana & Urga, Giovanni, 1999. " A Principal Components Analysis of Common Stochastic Trends in Heterogeneous Panel Data: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 749-67, Special I.
  8. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques.
  9. Favero, Carlo A. & Marcellino, Massimiliano, 2001. "Large Datasets, Small Models and Monetary Policy in Europe," CEPR Discussion Papers 3098, C.E.P.R. Discussion Papers.
  10. Snell, Andy, 1996. "A test of purchasing power parity based on the largest principal component of real exchange rates of the main OECD economies," Economics Letters, Elsevier, vol. 51(2), pages 225-231, May.
  11. Snell, Andy, 1998. "Testing for r versus r-1 cointegrating vectors," Journal of Econometrics, Elsevier, vol. 88(1), pages 151-191, November.
  12. Bai, Jushan, 2004. "Estimating cross-section common stochastic trends in nonstationary panel data," Journal of Econometrics, Elsevier, vol. 122(1), pages 137-183, September.
  13. McDonald, Ronald & Taylor, Mark P, 1993. "Regional House Prices in Britain: Long-Run Relationships and Short-Run Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 40(1), pages 43-55, February.
  14. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  15. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  16. Steven Cook, 2005. "Detecting long-run relationships in regional house prices in the UK," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(1), pages 107-118.
  17. Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation for Research in Economics, Yale University.
  18. Cook, Steven, 2005. "Regional house price behaviour in the UK: application of a joint testing procedure," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 345(3), pages 611-621.
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