Forward-looking financial risk management and the housing market in the United Kingdom: is there a role for sentiment indicators?

Abstract

Purpose

In the current low-interest market environment, more and more asset managers have started to consider to invest in property markets. To implement adequate and forward-looking risk management procedures, this market should be analyzed in more detail. Therefore, this study aims to examine the housing market data from the UK. More specifically, sentiment data and house prices are examined, using techniques of time-series econometrics suggested by Toda and Yamamoto (1995). The monthly data used in this study is the RICS Housing Market Survey and the Nationwide House Price Index – covering the period from January 2000 to December 2018. Furthermore, the authors also analyze the stability of the implemented Granger causality tests. In sum, the authors found clear empirical evidence for unidirectional Granger causality from sentiment indicator to the house prices index. Consequently, the sentiment indicator can help to forecast property prices in the UK.

Design/methodology/approach

By investigating sentiment data for house prices using techniques of time-series econometrics (more specifically the procedure suggested by Toda and Yamamoto, 1995), the research question whether sentiment indicators can be helpful to predict property prices in the UK is analyzed empirically.

Findings

The empirical results show that the RICS Housing Market Survey can help to predict the house prices in the UK.

Practical implications

Given these findings, the information provided by property market sentiment indicators certainly should be used in a forward-looking early warning system for house prices in the UK.

Originality/value

To authors’ knowledge, this is the first paper that uses the procedure suggested by Toda and Yamaoto to search for suitable early warning indicators for investors in UK real estate assets.

Citation

Kunze, F., Basse, T., Rodriguez Gonzalez, M. and Vornholz, G. (2020), "Forward-looking financial risk management and the housing market in the United Kingdom: is there a role for sentiment indicators?", Journal of Risk Finance, Vol. 21 No. 5, pp. 659-678. https://doi.org/10.1108/JRF-10-2019-0191