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Impact of housing price uncertainty on herding behavior: evidence from UK’s regional housing markets

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Abstract

This study investigates the impact of housing price uncertainty on the herding behavior in the UK's regional housing markets. Using a sample of thirteen regional housing markets and quarterly data from 1973Q4 to 2019Q2, we find that the probability of herding behavior is increasing in price uncertainty in nine of the thirteen regions and the national housing market. However, London and the Outer Metro regions, which have a high presence of institutional investors and high population, exhibit decreasing probability of herding as price uncertainty increases. We attribute this to the presence of informed investors and low asset value uncertainty. Therefore, since herding amplify market volatility, instability, fragility and asset mispricing, policy makers need to minimize policy uncertainties and implement regulatory mechanisms such as circuit breakers to circumvent the price and policy information risk from inducing non-information and irrational herding behavior among the investors.

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Notes

  1. Nguyen Thanh et al. (2020) has also developed a real estate uncertainty index for the US, but the data availability is till 2017, and provides an opportunity to analyse its role in US regional housing markets as part of future research.

  2. https://www.nationwide.co.uk/about/house-price-index/download-data#xtab:regional-quarterly-series-all-properties-data-available-from-1973-onwards.

  3. https://uk.housing-observatory.com/dashboard.html.

  4. The CSAD model is an improved variant of the cross-sectional standard deviation (CSSD) mode (Christie & Huang, 1995). The CSSD is sensitive to outliers.

  5. See Ngene et al. (2018) for the discussion and application of Bai and Perron (1998, 2003) structural break model.

  6. We note that HPU is highly cyclical and shaped by macro fundamentals. Therefore, we do not include additional explanatory variables since their impact is already incorporated in HPU.

  7. Based on the Nomenclature of Territorial Units for Statistics (NUTS) codes, the UK housing observatory has created new disaggregated regional house prices at three levels comprising 10, 35, and 144 regions (see: https://uk.housing-observatory.com/dashboard.html for further details). As a robustness check, we computed CSAD for these three levels of the dataset covering the quarterly period of 1995Q2 to 2020Q3 and then analyzed herding for the overall UK. The rolling herding coefficients, based on a 10-year window, for levels 1, 2, and 3 have been presented in “Appendix”, and we find that the herding coefficients are negative over a less prolonged period, compared to the results reported in Fig. 2, and generally covers 2008–2012. This period is, of course, associated with heightened uncertainty in the housing market in the UK caused by the GFC (2007–2009) and the European debt crisis (2010–2012).

  8. One potential explanation for this result is the structure of the housing market in Wales. The relatively low housing prices in Wales has attracted foreigners, especially from England, who buy second homes for vacation or retirement. This has traditionally priced out the locals from the housing market, resulting in potential housing market controls such as holiday home tax and subsidies for the locals to own homes. Such actions distort the housing market and the stifle herding behavior as buyers have limited real income to participate in the housing market.

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Authors and Affiliations

  1. Stetson-Hatcher School of Business (SHSB), Mercer University, 1501 Mercer University Drive, Macon, GA, 32107, USA

    Geoffrey M. Ngene

  2. Department of Economics, University of Pretoria, Pretoria, 0002, South Africa

    Rangan Gupta

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  1. Geoffrey M. Ngene
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Correspondence to Geoffrey M. Ngene.

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There is no financial or non-financial conflict of interest. Further, the study did not receive any funding.

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We, Geoffrey M. Ngene and Rangan Gupta, (the authors) assure that the manuscript titled, “Impact of Housing Price Uncertainty on Herding Behavior: Evidence from UK’s Regional Housing Markets” has fulfilled the following ethical standards. The research is the authors' original work and has not been previously published elsewhere. The research paper is not currently being considered for publication in another journal. The research reflects the authors' own research and analysis in a truthful and complete manner. The results and empirical evidence are appropriately placed in the context of prior and existing research. All sources used in the research are properly cited and referenced.

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Appendix

Appendix

See Fig. 4.

Fig. 4
figure 4

Rolling herding coefficients for Level 1, Level 2 and Level 3 disaggregated regional house prices of the UK sourced from the UK housing observatory

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Ngene, G.M., Gupta, R. Impact of housing price uncertainty on herding behavior: evidence from UK’s regional housing markets. J Hous and the Built Environ 38, 931–949 (2023). https://doi.org/10.1007/s10901-022-09975-9

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