Abstract
This paper extends the analysis of predictability and persistence of inflation-adjusted house price movements in the UK housing market both on a regional level across 13 regions and on a nationwide level. Applying a univariate time series approach, the results from the quarterly transaction-based Nationwide Building Society indices from 1974 to 2009 provide empirical evidence for a high persistence of house price movements. In addition to conducting parametric and non-parametric tests, we provide technical trading strategies as a robustness check to compare predictability across markets and to test whether or not the detected persistence can also be used for detecting turning points in the market. The empirical findings from the technical trading strategies support the results from the statistical tests. Moving average-based trading strategies perform extremely well in the southern regions, while trading strategies are less profitable for the northern regions and Wales. Thus, from an investors’ perspective, there are excess real returns from moving average-based strategies compared to a buy-and-hold strategy for most regional markets. From a household perspective, the findings support the importance of derivative markets where households could hedge their risk exposure from being homeowner.
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Notes
A random walk process means that any shock to the index is permanent and that there is no tendency for the index level to return to a trend path over time. In contrast, if indices follow a mean-reverting process, there generally exists a tendency for the index level to return to its trend path over time, and investors may be able to forecast future index changes by using information on past price changes (Chaudhuri and Wu 2003).
As a robustness check and to avoid spurious data, we have applied all statistical tests to the Halifax dataset which also contains countrywide and regional house price indices for a period ranging from 1983 to 2009. The results for the period from 1983 to 2009 based on both datasets (Nationwide and Halifax) strongly coincide. Given that both mortgage lenders construct their indices on their own data, the coinciding results support the representativeness of the data.
Further information about the two different price indices is provided by the Office for National Statistics (2010).
Log differences of prices are used because, for small changes, they approximately equal the price change from continuous compounding.
For brevity, the results from autocorrelation tests are not presented but coincide with the results from variance ratio tests. The results from autocorrelation tests are available from the authors upon request.
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We thank the editor C. F. Sirmans and two anonymous referees for very constructive and helpful comments. All errors are ours.
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Schindler, F. Persistence and Predictability in UK House Price Movements. J Real Estate Finan Econ 48, 132–163 (2014). https://doi.org/10.1007/s11146-012-9384-x
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DOI: https://doi.org/10.1007/s11146-012-9384-x