Slow but stable(ish) house price growth lies ahead

• ? UK house price growth is running out of steam. And with household incomes squeezed and the affordability of housing stretched, we think a prolonged period of very modest growth lies ahead. But the prospect of a crash is remote.
• ? At 2.6% in Q2 2017, annual house price growth is presently running at a four‐year low. This is a step change down from the recent peak of nearly 10% in mid‐2014 and average growth of 4% over the current economic expansion.
• ? Three developments are likely to lie behind this slowdown. The first is weak growth in households' real income, cutting the ability to save for a deposit or finance a move up the housing ladder. That said, past periods of sluggish income growth have not always been associated with low house price inflation.
• ? The second is the consequence of recent tax hikes imposed on buy‐to‐let investors and second‐home owners, which theory suggests should be capitalised in lower property prices.
• ? The third and perhaps most important reason is the increasing unaffordability of housing to an ever‐widening sub‐set of the population. The ratio of house prices to earnings is almost back at its pre‐crisis record. And the income of the average mortgage borrower is close to £60,000, more than double the average annual wage.
• ? This third factor has implications beyond price growth, suggesting both a permanently lower level of transactions and a further decline in the number of households with mortgages, continuing a trend which began at the beginning of the century.
• ? But set against these headwinds is the cushion provided by record lows for both mortgage rates and mortgage affordability. Overall, house prices are caught between a lack of traditional drivers of accelerating growth, but equally an absence of forces which have typically caused prices to fall. Hence, our expectation of a period of sluggish, but relatively stable, growth.

     

Measuring housing affordability: Looking beyond the median

We draw a distinction between the concepts of purchase affordability (whether a household is able to borrow enough funds to purchase a house) and repayment affordability (the burden imposed on a household of repaying the mortgage). We operationalize this distinction in the context of a new methodology for constructing affordability measures that draws on the value-at-risk concept and takes account of the whole distribution of household income and house prices rather than just the median. Empirically we find that the distinction between purchase and repayment affordability can be pronounced. In the Sydney prime mortgage market over the period 1996–2006, repayment affordability deteriorated very significantly while purchase affordability remained quite stable. This difference can be attributed to the loosening of credit constraints in the mortgage market which it seems has carried through primarily into higher house prices rather than an improvement in purchase affordability. We also show how median house-price-to-income ratio measures of affordability can be extended to take account of the whole distribution of income and house prices, and how as a result of differential skewness in the house price and income distributions the housing affordability problem may be significantly worse for lower income households than suggested by standard median measures.     

THE DYNAMICS OF UK NATIONAL AND REGIONAL HOUSE PRICES

In this paper, the Johansen cointegration technique is applied to modeling the dynamics of national and regional house prices. It is concluded that household income, real mortgage rate and housing completions are significant factors influencing house price changes at the national level. The underlying structure of the national market is investigated, showing that while price trends in some regions of the UK are strongly related by causal processes, others are relatively independent     

Determinants of house prices in Istanbul: a quantile regression approach

This paper uses quantile regression methods where a hedonic equation is estimated for each quantile of the conditional distribution of housing prices. The survey data are used to investigate the relationship between house prices and housing characteristics in Istanbul. This data set includes some housing characteristics of the dwellings like numbers of room, bathroom, heating system, location of house etc. In the results of this paper show some similarities and differences from earlier studies on housing prices. We find that age, cable tv, security, heating system, garage, kitchen area, increasing numbers of room and bathroom increase the house prices. Our findings also show that side variable which is a special factor for Istanbul real estate market has negative effect on the prices. It is clear that the factors of housing prices can change because of the properties of country, region or city. The results of this study may give some important interpretations for developing real estate market.     

UK Household Debt: A Threat to Growth or Stability?

The liberalisation of credit constraints in the 1970s for UK consumers has had important implications for the housing market and consumer spending. This paper by John Muellbauer¹ examines the factors that have driven soaring consumer debt and house price levels; in particular those observed since the mid-1990s. By relying on recent econometric evidence and trends in credit availability, real income per head, nominal and real after tax mortgage rates, measures of perceived risk and broad demographic trends, it also analyses the prospects for house prices, mortgage debt and unsecured debt over the coming years. The outlook is for a 'soft landing' in the housing market and associated declines in the rate of growth of consumer debt, which, although probably not smooth, does suggest the underlying situation is more benign and less crisis-prone than it was in 1988–89.     

Subprime mortgages and the housing bubble

This paper explores the link between the house-price expectations of mortgage lenders and the extent of subprime lending. It argues that bubble conditions in the housing market are likely to spur subprime lending, with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers. Since the demand created by subprime lending feeds back onto house prices, such lending also helps to fuel an emerging housing bubble. These ideas are illustrated in a theoretical model, and tentative support is found in empirical work exploring the connection between price expectations and the extent of subprime lending.     

中国城市居民住房支付能力研究

虽然住宅价格是由住宅市场的供给和需求决定的,但从长期来看,住宅价格应该与城市居民家庭的住房支付能力相适应.评价住房支付能力的指标有房价收入比(PIR)和住房可支付性指数(HAI),房价收入比用于判读住房价格是否合理,而住房可支付性指数能够反映家庭购买住房的还贷能力.论文通过计算2004年我国34个主要城市的房价收入比和住房可支付性指数,对我国城市居民的住房支付能力进行了城市排序.参照国外相关指标的评价标准,论文采用Pareto累计图的评价方法,得出了我国当前房价收入比和住房可支付性指数的分布区间.论文的研究成果既可作为政府调控城市住宅市场发展的依据,也可作为居民投资置业的依据.     

House prices and consumer welfare

We develop a new approach to measuring changes in consumer welfare due to changes in the price of owner-occupied housing. In our approach, an agent's welfare adjustment is defined as the transfer required to keep expected discounted utility constant given a change in current house prices. We demonstrate that, up to a first-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly offset by welfare losses to buyers. We show that this result holds (approximately) even in a model that accounts for changes in consumption and investment plans prompted by current house price changes. There can, however, be changes in welfare due to additions to the stock of housing, or to changes in the price of renovating and upgrading the existing stock of housing. For the United States, we estimate the welfare cost of house price appreciation to be an average of $127 per household per year over the 1984–1998 period.     

Some Truths about Ostriches: Who Doesn't Prepay Their Mortgages and Why They Don't

Prepayment estimation is essential in forecasting expected mortgage cash flow patterns. Accordingly, mortgage and mortgage-backed security prices are highly dependent on prepayment assumptions. Yet borrower prepayment behavior appears to be highly irrational, in the sense that many borrowers prepay their mortgages when it is not optimal to do so and fail to prepay their mortgages when the prepayment option is substantially in the money. In this paper, we explore the latter phenomenon, using a large data set of loans originated during the relatively high-rate 1980s that have failed to prepay by year-end 1996. As a control group, we examine similar loans that did prepay during the refinancing boom of 1993. By coupling Case–Shiller house price index information at the zip-code level, we can analyze the effect of broader housing market trends, especially housing appreciation, on borrower prepayment behavior. Although housing prices did decline significantly during the late 1980s and early 1990s in many areas of the United States, we find evidence that only about 25% of non-refinancing households might have been constrained by declining collateral values. Household demographic characteristics may provide some further explanation for this apparently non-optimizing behavior; however, we do not have a complete explanation.     

Macroeconomic determinants of international housing markets

This paper examines the long-term impact and short-term dynamics of macroeconomic variables on international housing prices. Since adequate housing market data are generally not available and usually of low frequency we apply a panel cointegration analysis consisting of 15 countries over a period of 30 years. Pooling the observations allows us to overcome the data restrictions which researchers face when testing long-term relationships among single real estate time series. This study does not only confirm results from previous studies, but also allows for a comparison of single country estimations in an integrated equilibrium framework. The empirical results indicate house prices to increase in the long-run by 0.6% in response to a 1% increase in economic activity while construction costs and the long-term interest rate show average long-term effects of approximately 0.6% and ?0.3%, respectively. Contrary to current literature our estimates suggest only about 16% adjustment per year. Thus the time to full recovery may be much slower than previously stated, so that deviations from the long-term equilibrium result in a dynamic adjustment process that may take up to 14 years.     

What factors drive the price–rent ratio for the housing market? A modified present-value analysis

We consider which factors determined the price–rent ratio for the housing market in 18 U.S. metropolitan statistical areas (MSAs) and at the national level over the period of 1975–2014. Based on a present-value framework, our proposed empirical model separates the price–rent ratio for a given market into unobserved components related to the expected real rent growth and the expected housing return, but is modified from standard present-value analysis by also including a residual component that captures non-stationary deviations of the price–rent ratio from its present-value level. Estimates for the modified present-value model suggest that the present-value residual (PVR) component is always important and sometimes very large at the national and MSA levels, especially for MSAs that have experienced frequent booms and busts in the housing market. In further analysis, we find that house prices in MSAs that have larger PVR components are more sensitive to mortgage rate changes. These are also the MSAs with less elastic housing supply. Also, comparing our results with a recent statistical test for periodically-collapsing bubbles, we find that MSAs with large estimated PVR components are the same MSAs that test positively for explosive sub-periods in their price–rent ratios, especially during the 2005–2007 subsample. Our approach allows us to estimate the correlation between shocks to expected rent growth, the expected housing return, and the PVR component. We find that the expected housing return and movements in the PVR component are highly positively correlated implying an impact of the expected housing return on house prices that is amplified from what a standard present-value model would imply. Our results also show that most of the variation in the present-value component of the price–rent ratio arises due to the variation in the expected housing return.     

A micro view on home equity withdrawal and its determinants: Evidence from Dutch households

For most households, home ownership is the largest wealth component that has become more accessible through innovation and deregulation in mortgage markets. This paper studies the factors driving home equity withdrawal (HEW) at the household level using Dutch survey data. In the Netherlands, house prices were growing fast and mortgage expenses are to a large extent tax deductible. Expectations and perceptions do seem to play an important role in HEW. Withdrawers tend to be more positive about house price developments and – although having lower income – less concerned about their future economic situation. HEW can have a significant impact on both households and the economy, with most of the equity released being reinvested in the housing sector and only a small share used to finance consumption expenditure.     

Housing appreciation, mortgage interest rates, and homeowner mobility

This paper presents a model of the optimal timing of tradeup, which considers consumption and investment motives of homeownership. Households determine the optimal timing of trading up so as to maximize their intertemporal utility of both housing and nonhousing consumption. First we consider current homeowners, who already own a house and expect that they trade up to a more valuable house at some point in the future. Housing appreciation tends to induce an earlier optimal timing of trading up. Moreover, housing appreciation makes current homeowners better off in terms of welfare. However, current homeowners suffer from a rise in mortgage interest rates. Second, we consider first-time home buyers, who have decided to buy a house and expect to trade up to a more valuable house in the future. Their initial housing consumption is determined by an initial downpayment constraint. In this case, the effect of housing appreciation on the optimal timing of trading up is ambiguous and, unlike current homeowners, first-time home buyers suffer from housing appreciation. Moreover, as current homeowners, first-time home buyers suffer from a rise in mortgage interest rates. Most of the theoretical analytic results are ambiguous. Accordingly, we perform numerical simulations based on the theoretical model in order to determine the most likely comparative effects for a stylized set of parameters.As is apparent, the model captures the recent observations on homewner mobility and suggests that macroeconomic variables such as housing appreciation and mortgage interest rates effect the optimal timing of trading up and homeowner's welfare. Nevertheless, the model in this paper has several shortcomings, which should be the subject of future research. First, transaction costs are ignored. If transaction costs are incorporated, the lock-in effect from a rise in mortgage interest rates is well explained. However, the general analysis above is not altered in any essential way. Second, multiple moves are not considered in this model. Therefore, we concentrate on the timing of one tradeup as opposed to the timing and frequency of trading up. In a different vein, it would be interesting to test empirically the importance of the effects of macroeconomic variables on trading up by using microdata.     

Hedonic analysis of a housing market in disequilibrium

This paper tests the hypothesis that information about housing market activity and about specific dwellings becomes capitalized into single family dwelling prices through a disequilibrium adjustment process. A dynamic price adjustment model, which is an extension of the standard hedonic model widely used in the literature, is derived, specified, and tested with both micro and aggregated data from the city of Chicago and for the period 1972–1976. The results show that from 32 to 75% of the variance in dwelling prices, unexplained by the standard hedonic attributes under assumptions of equilibrium, is explained by market activity signals such as mortgage interest rates and neighborhood transaction rates of the preceding period. Dwellings about which there is less information, making comparison pricing difficult, are shown to command a price premium. The standard equilibrium hypothesis appears readily rejectable and better predictions are obtained from the disequilibrium specifications. Several directions for extending this line of research are discussed.     

TESTS OF THE STANDARD URBAN MODEL: A Micro (Trade-Off) Alternative

Three methods of testing the validity of the monocentric model (the negative house price gradient, the wasteful commuting approach, and the hypothesis of a trade-off between housing expenditures and commuting costs) are evaluated. The negative house price gradient is not supported by several recent hedonic models. "Wasteful" commuting is a poor test because it persists even a policentric world and may be more the result of the weakness of journey-to-work minimization as a key determinant of residence and/or workplace location. This study uses the commuting information presented in the 1985 American Housing Survey in eight large metropolitan areas to show that the trade-off hypothesis fails badly. Heterogeneous Preference for housing, commuting and indeed for all goods and services, combined with a wide variety of workplaces and choice of residential locations at highly, variable rents and house prices may be the major reason why the trade-off is not generally observed.     

The housing market and the monetary transmission mechanism in the UK, in and out of EMU

This paper, prepared for the No Campaign, uses the OEF Global Macroeconometric Model to assess the impact of the housing market on the UK's convergence with the Eurozone. The OEF Model provides the ideal framework for such analysis, as it incorporates a detailed system for forecasting UK house prices, transactions, mortgage borrowing and their interaction with consumer spending and the wider economy, within the context of a model of the Eurozone economy. Our analysis suggests that, if the government were to wish to take the UK into EMU, action to reduce the impact of changes in interest rates on the housing market would be beneficial in improving the UK's economic stability.     

Impairment and negative equity in the Irish mortgage market

Amongst the many housing markets across the OECD presently experiencing difficulties, the Irish case stands out. Between 2004 and 2007, a significant house price bubble emerged in Ireland, while the real economy was enjoying persistently strong growth rates. The sharp decline in house prices post 2007 coupled with the significant increase in unemployment has generated a combination of difficulties for the Irish residential market. To date, much of the analysis and discussion of the Irish market has tended to focus on either the concept of mortgage repayment distress or potential negative equity. By examining the issue of credit default in the Irish mortgage market, we focus on the interaction between delinquency (repayment distress) and solvency (negative equity). Building on earlier work, which used the Survey on Income and Living Conditions (SILC), we marry existing estimates of repayment distress with estimates of negative equity for a representative sample of Irish households. Using copula modelling we then examine the dependence structure across the distributions of mortgage delinquency and solvency for these households. As a result, we are in a position to estimate the probability that a household experiencing repayment distress might also be in negative equity.     

Bubble trouble ‐ are British house prices significantly overvalued?

The OECD last December said British house prices were overvalued by 30% or more. There has been much talk, including in a 2005 speech by Gordon Brown, of a house price bubble. This article, by Gavin Cameron, John Muellbauer and Anthony Murphy of Oxford University, finds no significant evidence for a bubble from a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment and housing market flows, as well as stocks, driving prices. Furthermore, the model allows for shifts in real and nominal interest rate effects as credit markets liberalised.     

House Prices, Housing Investment and Demography Forecasts from the LBS/Abbey National Model of the UK Housing Market

A new housing sector has been incorporated into the London Business School model. This article outlines the new housing model, summarizes the research which has gone into its construction, and presents a forecast of the UK housing market. Using the new housing model, we forecast a moderate recovery in the housing market in the later part of 1991 and 1992. This recovery is however short-lived and does not result in such high rates of house price increase as previous house price booms (Chart 1).
Cuts in interest rates following entry to the exchange rate mechanism of the EMS prompt a recovery in house prices from the middle of 1991. House price inflation then peaks with an increase in average UK house prices in 1992 of 11 per cent over the previous year. Increases in real personal disposable income are modest, by the standards of the 1980s, and for this reason the recovery does not develop the momentum of previous house price booms. House price inflation moderates again in 1993 falling back to around 7 per cent. Housing starts and housing investment recover only slightly from their present depressed levels.
the recovery in house prices is weaker than that foreseen in our April Forecast Release. This is because real personal disposable income is now forecast to grow more slowly during 1991. Sterling's membership of the ERM is followed by a fall in interest rates, but it is the timing of interest rate cuts rather than their magnitude which differs from the earlier forecast. The changed profile of interest rates has altered the house price forecast only marginally.     

Do house prices reflect fundamentals? Aggregate and panel data evidence

We investigate whether recently high and consequently rapidly decreasing U.S. house prices have been justified by fundamental factors such as personal income, population, house rent, stock market wealth, building costs, and mortgage rate. We first conduct the standard unit root and cointegration tests with aggregate data. Nationwide analysis potentially suffers from problems of the low power of stationarity tests and the ignorance of dependence among regional house markets. Therefore, we also employ panel data stationarity tests which are robust to cross-sectional dependence. Contrary to previous panel studies of the U.S. housing market, we consider several, not just one, fundamental factors. Our results confirm that panel data unit root tests have greater power as compared with univariate tests. However, the overall conclusions are the same for both methodologies. The house price does not align with the fundamentals in sub-samples prior to 1996 and from 1997 to 2006. It appears that the real estate prices take long swings from their fundamental value and it can take decades before they revert to it. The most recent correction (a collapsed bubble) occurred around 2006.