Modelling UK House Prices with Structural Breaks and Conditional Variance Analysis

Abstract

This paper differs from previous research by examining the existence of structural breaks in the UK regional house prices as well as in the prices of the different property types (flats, terraced, detached and semi-detached houses) in the UK as a whole, motivated by the uncertainty in the UK housing market and various financial events that may lead to structural changes within the housing market. Our paper enhances the conventional unit root tests by allowing for structural breaks, while including structural break tests strengthens our analysis. Our empirical results support the existence of structural breaks in the mean equation in seven out of thirteen regions of the UK as well as in three out of four property types, and in the variance equation in six regions and three property types. In addition, using a multivariate GARCH approach we examine both the behaviour of variances and covariances of the house price returns over time. Our results have significant implications for appropriate economic policy selection and investment management.

This is a preview of subscription content, log in to check access.

References

  1. Andrews, D. W. K. (1993). Tests for parameter instability and structural change with unknown change point. Econometrica, 61(4), 821–856. https://doi.org/10.2307/2951764.

    Article  Google Scholar 

  2. Antonakakis, N., Gupta, R., & André, C. (2015). Dynamic co-movements between economic policy uncertainty and housing market returns. Journal of Real Estate Portfolio Management, 21(1), 53–60.

    Google Scholar 

  3. Bai, J. (1997). Estimating multiple breaks one at a time. Econometric Theory, 13(3), 315–352. https://doi.org/10.1017/S0266466600005831.

    Article  Google Scholar 

  4. Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66(1), 47–78. https://doi.org/10.2307/2998540.

    Article  Google Scholar 

  5. Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18(1), 1–22. https://doi.org/10.1002/jae.659.

    Article  Google Scholar 

  6. Banerjee, A., Lumsdaine, R. L., & Stock, J. H. (1992). Recursive and sequential tests of the unit root and trend-break hypothesis: theory and international evidence. Journal of Business and Economic Statistics, 10, 271–287.

    Google Scholar 

  7. Begiazi, K., Asteriou, D., & Pilbeam, K. (2016). A multivariate analysis of United States and global real estate investment trusts. International Economics and Economic Policy, 13(3), 467–482. https://doi.org/10.1007/s10368-016-0349-z.

    Article  Google Scholar 

  8. Bollerslev, T., Engle, R. F., & Wooldridge, J. M. (1988). A capital asset pricing model with time varying covariances. Journal of Political Economy, 96(1), 116–131. https://doi.org/10.1086/261527.

    Article  Google Scholar 

  9. Brooks, C. (2014). Introductory econometrics for finance. Cambridge: Cambridge University Press.

    Google Scholar 

  10. Cameron, G., Muellbauer, J., & Murphy, A. (2006). Was there a British house price bubble? Evidence from a regional panel, centre for economic policy research (CEPR) discussion paper 5619. https://ssrn.com/abstract=913390. Accessed 11 Jan 2018.

  11. Campbell, S. D., Davis, M. A., Gallin, J., & Martin, R. F. (2009). What moves housing markets: a variance decomposition of the rent–price ratio. Journal of Urban Economics, 66(2), 90–102. https://doi.org/10.1016/j.jue.2009.06.002.

    Article  Google Scholar 

  12. Canarella, G., Miller, S., & Pollard, S. (2012). Roots and structural change. Urban Studies, 49(4), 757–776. https://doi.org/10.1177/0042098011404935.

    Article  Google Scholar 

  13. Chang, C.L., & McAleer, M. (2017). The fiction of full BEKK (no. 17–015/III). Tinbergen Institute.

  14. Chien, M.-S. (2010). Structural breaks and the convergence of regional house prices. The Journal of Real Estate Finance and Economics, 40(1), 77–88. https://doi.org/10.1007/s11146-008-9138-y.

    Article  Google Scholar 

  15. Damianov, D. S., & Escobari, D. (2016). Long-run equilibrium shift and short-run dynamics of US home price tiers during the housing bubble. The Journal of Real Estate Finance and Economics, 53(1), 1–28. https://doi.org/10.1007/s11146-015-9523-2.

    Article  Google Scholar 

  16. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427–431.

    Google Scholar 

  17. Diebold, F. X. (1986). Modeling the persistence of conditional variances: comment. Econometric Reviews, 5(1), 51–56. https://doi.org/10.1080/07474938608800096.

    Article  Google Scholar 

  18. Dolde, W., & Tirtiroglue, D. (1997). Temporal and spatial information diffusion in real estate price changes and variances. Real Estate Economics, 25(4), 539–565. https://doi.org/10.1111/1540-6229.00727.

    Article  Google Scholar 

  19. Engle, R. F., & Kroner, K. F. (1995). Multivariate simultaneous generalized ARCH. Economic Theory, 11(01), 122–150. https://doi.org/10.1017/S0266466600009063.

    Article  Google Scholar 

  20. Göktaş, P., & Dişbudak, C. (2014). Modelling inflation uncertainty with structural breaks case of Turkey (1994–2013). Mathematical Problems in Engineering, 2014, 1–19. https://doi.org/10.1155/2014/284161.

    Article  Google Scholar 

  21. Han, L. (2013). Understanding the puzzling risk-return relationship for housing. Review of Financial Studies, 26(4), 877–928. https://doi.org/10.1093/rfs/hhs181.

    Article  Google Scholar 

  22. Hansen, B. E. (2001). The new econometrics of structural change: dating breaks in US labor productivity. Journal of Economic Perspectives, 15(4), 117–128. https://doi.org/10.1257/jep.15.4.117.

    Article  Google Scholar 

  23. Hilber, C. A. L., & Vermeulen, W. (2016). The impact of supply constraints on house prices in England. The Economic Journal, 126(591), 358–405. https://doi.org/10.1111/ecoj.12213.

    Article  Google Scholar 

  24. Hossain, B., & Latif, E. (2009). Determinants of housing price volatility in Canada: a dynamic analysis. Applied Economics, 41(27), 3521–3531. https://doi.org/10.1080/00036840701522861.

    Article  Google Scholar 

  25. Jarque, C. M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255–259. https://doi.org/10.1016/0165-1765(80)90024-5.

    Article  Google Scholar 

  26. Karoglou, M., Morley, B., & Thomas, D. (2013). Risk and structural instability in US house prices. The Journal of Real Estate Finance and Economics, 46(3), 424–436. https://doi.org/10.1007/s11146-011-9332-1.

    Article  Google Scholar 

  27. Lee, C. L. (2009). Housing price volatility and its determinants. International Journal of Housing Markets and Analysis, 2(3), 293–308.

    Article  Google Scholar 

  28. Lee, C. L., & Reed, R. (2013). Volatility decomposition of Australian housing prices. Journal of Housing Research, 23(1), 21–43.

    Google Scholar 

  29. Lee, J., List, J. A., & Strazicich, M. C. (2006). Non-renewable resource prices: deterministic or stochastic trends? Journal of Environmental Economics and Management, 51(3), 354–370. https://doi.org/10.1016/j.jeem.2005.09.005.

    Article  Google Scholar 

  30. Lin, P. T., & Fuerst, F. (2014). Volatility clustering, risk-return relationship, and asymmetric adjustment in the Canadian housing market. Journal of Real Estate Portfolio Management, 20(1), 37–46.

    Google Scholar 

  31. Malpezzi, S., & Maclennan, D. (2001). The long-run price elasticity of supply of new residential construction in the United States and the United Kingdom. Journal of Housing Economics, 10(3), 278–306. https://doi.org/10.1006/jhec.2001.0288.

    Article  Google Scholar 

  32. Meen, G. (1999). Regional house prices and the ripple effect: a new interpretation. Housing Studies, 14(6), 733–753. https://doi.org/10.1080/02673039982524.

    Article  Google Scholar 

  33. Miao, H., Ramchander, S., & Simpson, M. W. (2011). Return and volatility transmission in US housing markets. Real Estate Economics, 39(4), 701–741. https://doi.org/10.1111/j.1540-6229.2010.00303.x.

    Article  Google Scholar 

  34. Miles, W. (2011a). Long-range dependence in US home price volatility. The Journal of Real Estate Finance and Economics, 42(3), 329–347. https://doi.org/10.1007/s11146-009-9204-0.

    Article  Google Scholar 

  35. Miles, W. (2011b). Clustering in UK home price volatility. Journal of Housing Research, 20(1), 87–101.

    Google Scholar 

  36. Miller, N., & Peng, L. (2006). Exploring metropolitan housing price volatility. The Journal of Real Estate Finance and Economics, 33(1), 5–18. https://doi.org/10.1007/s11146-006-8271-8.

    Article  Google Scholar 

  37. Morley, B., & Thomas, D. (2011). Risk–return relationships and asymmetric adjustment in the UK housing market. Applied Financial Economics, 21(10), 735–742. https://doi.org/10.1080/09603107.2010.535782.

    Article  Google Scholar 

  38. Morley, B., & Thomas, D. (2016). An empirical analysis of UK house price risk variation by property type. Review of Economics & Finance, 6, 45–56.

    Google Scholar 

  39. Ortalo-Magne, F., & Rady, S. (2002). Tenure choice and the riskiness of non-housing consumption. Journal of Housing Economics, 11, 226–279.

    Article  Google Scholar 

  40. Perron, P. (1989). The great crash, the oil price shock and the unit root hypothesis. Econometrica, 57(6), 77–88.

    Article  Google Scholar 

  41. Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometrics, 80(2), 355–385. https://doi.org/10.1016/S0304-4076(97)00049-3.

    Article  Google Scholar 

  42. Perron, P., & Vogelsang, T. J. (1992). Nonstationarity and level shifts with an application to purchasing power parity. Journal of Business and Economic Statistics, 10, 301–320.

    Google Scholar 

  43. Peterson, W., Holly, S., & Gaudoin, P. (2002). Further work on an economic model of the demand and need for social housing. London: Department for Environment, Food & Rural Affairs.

    Google Scholar 

  44. Quandt, R. E. (1960). Tests of the hypothesis that a linear regression system obeys two separate regimes. Journal of the American Statistical Association, 55(290), 324–330. https://doi.org/10.1080/01621459.1960.10482067.

    Article  Google Scholar 

  45. Rapach, D. E., & Strauss, J. K. (2008). Structural breaks and GARCH models of exchange rate volatility. Journal of Applied Econometrics, 23(1), 65–90. https://doi.org/10.1002/jae.976.

    Article  Google Scholar 

  46. Stevenson, S., Wilson, P., & Zurbruegg, R. (2007). Assessing the time-varying interest sensitivity of real estate securities. European Journal of Finance, 13(8), 705–715. https://doi.org/10.1080/13518470701705678.

    Article  Google Scholar 

  47. Tsai, I. C., Chen, M.-C., & Ma, T. (2010). Modelling house price volatility states in the UK by switching ARCH models. Applied Economics, 42(9), 1145–1153. https://doi.org/10.1080/00036840701721133.

    Article  Google Scholar 

  48. Vogelsang, T. J., & Perron, P. (1998). Additional tests for a unit root allowing for a break in the trend function at an unknown time. International Economic Review, 39(4), 1073–1100. https://doi.org/10.2307/2527353.

    Article  Google Scholar 

  49. Willcocks, G. (2010). Conditional variances in UK regional house prices. Spatial Economic Analysis, 5(3), 339–354. https://doi.org/10.1080/17421772.2010.493951.

    Article  Google Scholar 

Download references

Acknowledgements

The authors gratefully acknowledge the valuable comments and suggestions of two anonymous referees.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Kyriaki Begiazi.

Appendices

Appendix 1

Table 6 Unit root tests by region
Table 7 ARMA order and ARCH tests by region
Table 8 Unit root tests – UK by property type

Appendix 2

Fig. 1
figure1

Conditional variances and covariances – diagonal BEKK

Fig. 2
figure2

Conditional correlations – diagonal BEKK

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Begiazi, K., Katsiampa, P. Modelling UK House Prices with Structural Breaks and Conditional Variance Analysis. J Real Estate Finan Econ 58, 290–309 (2019). https://doi.org/10.1007/s11146-018-9652-5

Download citation

Keywords

  • UK regions
  • House prices
  • Structural break
  • Volatility
  • MGARCH
  • BEKK

JEL Classification

  • C22
  • C32
  • G1
  • R15