Booms and Busts in the UK Housing Market

TLDR

Financial liberalisation of mortgage markets in the 1980s and transaction costs imply that UK house price dynamics should exhibit notable shifts and nonlinearities. The study analyses the volatile behaviour of UK house prices from 1957 to 1994 using an annual econometric model. The model incorporates expectations, demography, rented‑sector supply spillovers, and composition biases in the official house price index. Results confirm theory, indicating that wealth effects, consumption, real interest rates, and income expectations increasingly influenced house price movements.

Abstract

The often volatile behaviour of UK house prices between 1957 and 1994 is analysed in an annual econometric model. Theory suggests that financial liberalisation of mortgage markets in the 1980s should have led to notable shifts in house price behaviour. The evidence supports the predictions of theory, suggesting shifts took place in wealth effects, as in the consumption function, and that real interest rates and income expectations became more important. The presence of transactions costs suggests important nonlinearities in house price dynamics. The paper also contains an explicit econometric treatment of expectations, demography, supply spillovers from the rented sector and of composition biases in the official house price index.