The 2007 financial crisis and the UK residential housing market: Did the relationship between interest rates and house prices change? |
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| Institution: | 1. Salford Business School, University of Salford, Salford M5 4WT, UK;2. Coventry Business School, Coventry University, Coventry CV1 5FB, UK;1. Department of Money and Banking, National Chengchi University, Taipei, Taiwan, ROC;2. Actuarial Department, Taiwan Life Insurance Co. Ltd, Taiwan, ROC;1. Department of Economics, 315A Littauer Center, Harvard University, Cambridge, MA 02138, USA;2. Kellogg School of Management, Northwestern University, 2211 Campus Drive, Evanston, IL 60208, USA |
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| Abstract: | This paper investigates the impact of the 2007 financial crisis on the relationship between real mortgage interest rates and real house prices. It applies a dynamic conditional correlation based methodology that uses fractionally differenced data along with controls for structural breaks and non-interest-rate related factors that influence house prices. The key finding made is that the financial crisis had a long-term structural impact on the monetary transmission relationship. For example, we find that the mean conditional correlation between house prices in England and Wales and the three-year fixed mortgage rate rose by 6.6 percentage points. Similarly, the mean correlation between prices and the standard variable mortgage rate increased 6.4 percentage points to 54%. These findings suggest to us that interest-rate-based monetary policy still has an important role to play in the housing market. |
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