Was There A British House Price Bubble? Evidence from a Regional Panel

Abstract

Many observers, including the OECD are alarmed by the seeming bubble type behaviour of British house prices. This paper investigates with a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment and interaction effects between an index of credit availability and real and nominal interest rates. The model explains periods of boom and bust in the British housing market, as well as the ripple effect from the London housing market to the rest of the country. The evidence suggests that so far there has been no significant bubble in the British housing market in the new millenium but cannot rule out some bubble behaviour in 1988-9.