The dynamic relationship between UK housing finance, house prices and their interplay with macroeconomic indicators

Aha, Bismark (2022) The dynamic relationship between UK housing finance, house prices and their interplay with macroeconomic indicators. Doctoral thesis, Birmingham City University.

Bismark Aha_PhD Thesis published_Final version_Submitted Sept 2021_Final Award Mar 2022.pdf - Accepted Version

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A strong, stable and vibrant residential housing market occupies a pivotal position in any mature economy. In the United Kingdom, due to the high owner-occupation rate and the large stock of residential mortgage debt, house price trends attract considerable interest from economists, politicians, lenders and the general public. Over the last five decades, there have been noticeable increases in UK house prices. In particular, house price growth from the late 1990s to 2007was both substantial and volatile, outpacing inflation and income growth. House price-to-income (PTI) ratios more than doubled between 1995 and 2006 and affordability worsened. At the same time, the UK mortgage market witnessed significant transition and expansion aided by the deregulation and liberalisation of the financial and mortgage markets in the 1980s.

This study contributes to and extends current knowledge on the linkages between house prices and housing finance. The study empirically examines the role of housing finance in the cyclicality within the UK housing market over a fifty-year period: 1968 to 2018. In addition to establishing the macroeconomic indicators associated with house price growth, the key drivers of the mortgage credit expansion and how they interact with macroeconomic variables and regulatory policy in shaping house prices are examined.

Key long-run drivers of UK house price growth were identified as macroeconomic drivers (government expenditure, money supply, disposable incomes, unemployment), demographic drivers (size of the working population), financial drivers (mortgage credit supply, mortgage interest rates, term structure of interest rates) and housing market factors (housing supply and construction cost). Using vector error correction modelling (VCM) and cointegration analysis, the existence of both long- and short-term relationships were observed. The study identified an important role for interest rates, mortgage flow and money supply in the short-run dynamics of UK house prices.

The determinants of UK residential mortgage debt growth were further examined in a vector autoregression (VAR) framework. The study identified property market factors (house price growth, homeownership preferences, housing supply) and macroeconomic indicators (GDP growth, changes in base rate, money supply, employment, and inflation) as the key driving factors. The results highlight an important role of liquidity and housing credit in shaping UK house prices from the late 1980s to the 2000s.

It was further observed that the UK housing market has experienced structural changes in recent years, implying that conventional fundamental relationships no longer hold. Evidence from spline regression analysis suggests that the determinants of UK house prices have changed in structure, magnitude and direction over time, varying with the prevailing macroeconomic indicators.

The study represents a systematic empirical examination of the role and impact of macroeconomic and financial drivers on the UK housing market performance and housing finance. The findings suggest that the UK government’s macro-prudential tightening of the mortgage lending market through the implementation of the Mortgage Market Review (MMR) could have suppressive impact on mortgage lending and prevent the credit-fuelled boom seen in the 1990s and early 2000s. It is important that the highlighted house price determinants and relationships are monitored carefully. Long-term house price modelling should take into account the changing nature of house price drivers, ensuring that selected models and determinants incorporate post-evaluation analysis and use structured market research to identify relevant factors influencing price dynamics under the prevailing macroeconomic and regulatory regime.

Item Type: Thesis (Doctoral)
23 September 2021Submitted
11 March 2022Accepted
Uncontrolled Keywords: Housing finance, house prices, residential housing market, macroeconomic determinants, United Kingdom
Subjects: CAH15 - social sciences > CAH15-02 - economics > CAH15-02-01 - economics
Divisions: Doctoral Research College > Doctoral Theses Collection
Faculty of Computing, Engineering and the Built Environment
Depositing User: Jaycie Carter
Date Deposited: 22 Sep 2022 13:01
Last Modified: 22 Sep 2022 13:01

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