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Modelling Structural Change In The UK Housing Market: A Comparison Of Alternative House Price Models

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Abstract

This paper develops a new approach to the determination of house prices, with housing demand being conditioned directly on consumers' expenditure rather than the determinants of expenditure. We obtain estimates of the long-run demand for housing condition which relates the marginal rate of substitution between the consumption of housing services and the consumption of goods to the real user cost of housing. House prices are assumed to adjust so as to clear the housing market. Conditioning on consumption ensures that the permanent income measure used in determining the level of consumption is consistently reflected in housing demand, so that consumption of goods and housing services cannot diverge indefinitely. It also ensures that the effects of financial liberalisation on the relative consumption of housing and non-housing goods and services can be estimated separately from its common influence on their level. These effects are captured using the average loan-value ratio for first-time buyers. Our model is tested on UK data from 1968 to 1994. The proposed model is found to have structurally stable parameters across both the housing boom of the late 1980s and the recent housing market downturn. Statistical comparisons with the more conventional models in use at HM Treasury and the Bank of England during the early 1990s provide additional evidence in favour of our proposed approach.

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  • Nigel Pain & Peter Westaway, 1996. "Modelling Structural Change In The UK Housing Market: A Comparison Of Alternative House Price Models," National Institute of Economic and Social Research (NIESR) Discussion Papers 98, National Institute of Economic and Social Research.
  • Handle: RePEc:nsr:niesrd:239
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    1. 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.
    2. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-348, August.
    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.
    4. Ericsson, Neil R., 1992. "Cointegration, exogeneity, and policy analysis: An overview," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 251-280, June.
    5. Fisher, Gordon R. & McAleer, Michael, 1981. "Alternative procedures and associated tests of significance for non-nested hypotheses," Journal of Econometrics, Elsevier, vol. 16(1), pages 103-119, May.
    6. repec:nsr:niesrd:15 is not listed on IDEAS
    7. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-164, March.
    8. MacKinnon, James G, 1992. "Model Specification Tests and Artificial Regressions," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 102-146, March.
    9. Meen, Geoffrey P, 1990. "The Measurement of Rationing and the Treatment of Structural Change in the UK Mortgage Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(2), pages 167-187, April-Jun.
    10. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-162, April.
    11. Miles, David K, 1993. "House Prices, Personal Sector Wealth and Consumption: Some Conceptual and Empirical Issues," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 35-59, Suppl..
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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