The purpose of this paper is to validate and quantify the effect of key macroeconomic drivers on London house prices using annual data over the period 1983–2016.
Within this context, the authors estimate alternative error-correction and partial-adjustment models (PAMs), which have been widely used in the empirical literature in modelling the slow adjustments of house prices to demand and supply shocks.
The results verify the existence of a strong long-term relationship between London house prices and key macroeconomic variables, such as UK GDP, London population and housing completions. A key finding of the study relevant to the debate on the causes of the housing affordability crisis is that the results provide little evidence in support of the argument that user demand, which is captured in the author’s model by Greater London population, may have had a diminished role in driving house price inflation in London.
The practical and policy implications of the results are that increased homebuilding activity in London will undoubtedly help limit house price increases. Also, any potential reduction of immigration and economic growth due to Brexit will also have a similar effect.
The originality of this research lies in the use of annual data that may better capture the long-term effect of macroeconomic drivers on house prices and the estimation of such effects through both error-correction and partial-adjustment models.
The purpose of this paper is to assess whether the rapid accumulation of bank deposits before the global financial crisis and their subsequent drastic reduction was the…
The purpose of this paper is to assess whether the rapid accumulation of bank deposits before the global financial crisis and their subsequent drastic reduction was the main driving force of the Cyprus house price cycle over the period 2006–2015.
To this aim we estimate a three-equation model in which house prices are determined by housing loans, among other factors, and housing loans are determined by bank deposits. All equations are estimated using partial adjustment model specifications.
Our findings indicate that housing loans, which capture the effect of credit availability on housing demand, had the smallest effect on house prices, thus providing little support to our proposition of a deposits-driven cycle in house prices.
The main limitation of the study is the use of the housing loan stock instead of the actual volume of housing loans in each period due to lack of such data. As a result our econometric estimates may not accurately capture the magnitude of the effect of housing loans on house prices.
The study has important practical implications for policy makers as it highlights the importance of availability of credit in supporting effective demand for housing during periods of economic growth. Furthermore, it highlights the key role of house price increases in combination with the collateral effect in driving the house price cycle.
This is among the few studies internationally and the first study in Cyprus that attempts to link econometrically the credit and house price cycles that were caused by the global financial crisis.