Click here to load reader

New An Econometric Analysis of U.K. Regional Real Estate Markets · PDF file 2016. 11. 7. · Real Estate Markets Alisa Yusupova BSc Saint-Petersburg State University of ... (1999),

  • View
    1

  • Download
    0

Embed Size (px)

Text of New An Econometric Analysis of U.K. Regional Real Estate Markets · PDF file 2016. 11....

  • An Econometric Analysis of U.K. Regional

    Real Estate Markets

    Alisa Yusupova BSc Saint-Petersburg State University of Economics,

    MSc Lancaster University

    Submitted in partial fulfilment of the requirements for the degree of

    Doctor of Philosophy at the Department of Economics, Lancaster

    University.

    November 2016

  • Declaration

    I hereby declare that this thesis is my own work and that it has not been submitted for any

    other degree.

    Alisa Yusupova

    Signature:

    ii

  • To my mother

    iii

  • Abstract

    This thesis presents an analysis of UK national and regional property price dynamics with the focus on

    changes in the time-series properties of real estate prices and their forecastability. The main research ques-

    tions addressed are the following. First, have UK regional property prices experienced episodes of explosive

    dynamics in the past and if so, can these episodes be explained by movements in economic fundamentals.

    Second, considering the substantial instability of UK real estate markets over the last few decades, which

    are the best econometric models for predicting future house price dynamics and which economic variables

    are the most important drivers of property prices movements.

    iv

  • Acknowledgments

    I would like to express my sincere gratitude to my supervisors, Prof David Peel, Dr Efthymios Pavlidis

    and Prof Ivan Paya, who put their faith in me, showed me the road and guided me throughout this exciting

    journey. I thank them for being the source of motivation, for their support and encouragement, and for

    giving me the opportunity to go farther than I would have ever thought I could go.

    This thesis is devoted to my mother, without whom it would have never been written. I want to thank her

    for being by my side, for her love, patience and support and for believing in me, when, perhaps too often,

    I had trouble believing in myself. I thank my father, for his understanding, sense of humour, crosswords

    in the morning and the right advice at the right time. Last but not least, I will always be grateful to my

    grandmother, Nina, whom I love and miss and who, not knowing it, helped to make the impossible possible.

    Thank you.

    v

  • Contents

    Declaration ii

    Abstract iv

    Acknowledgments v

    1 Introduction 1

    2 Exuberance in U.K. Housing Markets 5

    2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

    2.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

    2.3 Model of Real Estate Prices: Formulation and Estimation Results . . . . . . . . . . . . . . . 14

    2.4 Exuberance in Regional Housing Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

    2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

    Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

    Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

    Appendix C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

    3 Forecasting U.K. House Prices During Turbulent Periods 60

    3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

    3.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

    3.3 Forecasting Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

    3.3.1 Dynamic Model Averaging and Dynamic Model Selection . . . . . . . . . . . . . . 66

    3.3.2 Alternative Forecasting Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

    3.3.3 Forecast Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

    3.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

    3.4.1 Comparison of Forecast Performance . . . . . . . . . . . . . . . . . . . . . . . . . 78

    3.4.2 Evolution of the Out-of-Sample Performance . . . . . . . . . . . . . . . . . . . . . 84

    3.4.3 Best House Price Predictors: Over Time and Across Regions . . . . . . . . . . . . . 87

    vi

  • 3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

    Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

    4 Concluding Remarks 108

    Bibliography 110

    vii

  • List of Tables

    2.1 The Model of Regional House Prices: Parameter Estimates . . . . . . . . . . . . . . . . . . 15

    2.2 The Model of Regional House Prices: Summary of Single-Equation Diagnostics . . . . . . . 22

    2.3 The SADF and the GSADF test results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

    2.4 Equilibrium Correction Terms: The SADF and the GSADF test results . . . . . . . . . . . . 34

    3.1 Annualised Real Property Price Growth Rates: Summary of Descriptive Statistics . . . . . . 63

    3.2 Forecasting Performance by Region; h = 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 79

    3.3 Forecasting Performance: ARDL Models; h = 1 . . . . . . . . . . . . . . . . . . . . . . . 81

    3.4 Forecasting Performance by Region; h = 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 83

    3.5 Forecasting Performance: ARDL Models; h = 4 . . . . . . . . . . . . . . . . . . . . . . . 85

    viii

  • List of Figures

    2.1 Real House Prices: Regional Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

    2.2 Price-to-Income Ratios: Regional Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

    2.3 Regional Real House Prices: Date-Stamping of Explosive Episodes . . . . . . . . . . . . . 28

    2.4 Ratio of Real House Prices to Real Personal Disposable Income: Date-Stamping of Explo-

    sive Episodes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

    2.5 Date-Stamping of Explosive Episodes: Real House Prices and Price-to-Income Ratio . . . . 32

    2.6 Date-Stamping Episodes of Nationwide Exuberance . . . . . . . . . . . . . . . . . . . . . . 32

    2.7 Model of Regional House Prices: Equilibrium Correction Terms and Episodes of Exuberance 35

    2.8 Model of Regional House Prices: Equilibrium Correction Terms . . . . . . . . . . . . . . . 37

    3.1 Relative Out-of-Sample Performance of Candidate Forecasting Models . . . . . . . . . . . . 86

    3.2 Expected Dimension of DMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

    3.3 Ten House Price Predictors: Posterior Probabilities of Inclusion (h=1) . . . . . . . . . . . . 91

    3.4 Ten House Price Predictors: Posterior Probabilities of Inclusion (h=4) . . . . . . . . . . . . 92

    3.5 Best House Price Predictors in Volatile and Stable Property Markets: Posterior Probabilities

    of Inclusion (h=1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

    3.6 Best House Price Predictors in Volatile and Stable Property Markets: Posterior Probabilities

    of Inclusion (h=4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

    ix

  • CHAPTER 1

    Introduction

    Study the past if you would divine

    the future. — Confucius, 551-479 BC

    Over the last years an interest in the dynamics of UK commercial and residential property prices in the

    media and among policy makers has been steadily increasing, and for a good reason. The UK property prices

    have now reached unprecedentedly high levels. In particular, house prices in London rose by nearly 11% in

    the past year only and currently exceed their pre-crisis peak value of 2007 by more than 50%. Mr. Mark

    Carney, the Governor of the Bank of England, has expressed his concerns about the risk that the booming

    housing markets poses to the UK economy:

    ‘When we look at domestic risks, the biggest risk to financial stability, and therefore to the

    durability of the expansion, centres in the housing market.’

    Mr. Mark Carney (cited in Schomberg and Addison, 2014)

    Following the devastating effects of the latest boom and bust in the housing markets, more and more

    international organisations, central banks and research institutes become engaged in monitoring the property

    price developments. IMF economists warn that property prices in the UK, and in London in particular, might

    be growing too quickly and can soon rise to unsustainable levels:

    ‘House price inflation is particularly high in London, and is becoming more widespread. So

    far, there are few of the typical signs of a credit-led bubble.’

    IMF (2014)

    1

  • In this context, understanding the dynamics of real estate prices, what causes house prices to move and

    the nature of historical episodes of property price exuberance becomes particularly important. This thesis is

    built upon two research questions. First, have non-fundamental factors, such as rational speculative bubbles,

    played a role in the behaviour of the UK housing market in the past? And, second,

Search related