Cyclical and structural change in the UK housing market

Purpose – This paper aims to examine factors affecting house prices separating cyclical and structural influences. In addition to considering the role of income and interest rates, it examines whether access to a key source of liquidity, mortgage finance, could affect the long-term behaviour of the market rather than being a short run impact. In addition, the paper considers whether the effects of mortgage funding and the financial crisis affect all regions equally or whether there exist particular differences across regions of the UK. Design/methodology/approach – Using quarterly time series data from 1983q1 to 2011q2, the paper employs a Johansen cointegration approach to identify the long-run (permanent) and short-run (transitory) factors affecting house prices both at national and regional levels. It identifies whether there is a separate influence for mortgage lending from interest rates and general money market liquidity, as captured by money supply M3, and whether these effects are permanent or temporary. The paper employs impulse response functions to examine house price evolution due to innovations in mortgage lending and quantifies these effects with and without the financial crisis. Findings – The findings indicate that real personal disposable income, mortgage market liquidity, interest rates and money supply as well as housing stock supply impact house prices permanently with the expected signs. The findings are broadly consistent at national and regional level, although there are some significant regional variations in results. The mean reversion of the housing markets is captured via the error correction term which is significant at the national level and in all but three regions. Impulse response functions show how house prices respond to shocks in mortgage lending and how this varies with and without a financial crisis