Fundamental drivers of house price change: the role of money, mortgages, and migration in Spain and the United Kingdom

Abstract

There has been substantial house price inflation, particularly during the last decade, until the onset of the financial crisis. This price inflation has far exceeded growth in disposable incomes and has led to an increase in asset wealth. At the same time, mortgage lending rose, increasing liquidity in the market. In this paper we compare the macroeconomy effects of house prices in Spain and the UK. We examine the interaction between the housing market, the financial sector, and the macroeconomy in both countries drawing comparisons between them. We find that income and mortgage flows have caused house price appreciation in both countries, interacting with migration flows. However there are differences between the countries. Income plays a more significant role in house price determination in the UK than in Spain, whilst migration is more important in the Spanish market. The impact of mortgages and liquidity is found to be stronger in the UK. The study separates out the impact of money supply and mortgage finance identifying the role of each. Importantly by identifying the separate and nationally different influences they have, it proposes a research agenda in which they are explicitly identified in future modelling of housing markets across countries.

Keywords:

• house price drivers
• mortgage lending
• modelling
• vector autoregressive models
• error correction

Notes

1. Ball et al. (2010) show that estimates of house price supply elasticities vary depending upon whether data are in levels or rates of change with the latter producing higher estimates.

2. House prices in Spain experience a significant reduction during the early eighties and remain unchanged in real terms for more than ten years. The Spanish house price to income ratio is low until the late nineties when it began to increase.

3. These parameters belong to the inflation variable in the Spanish model, which is not included in the error correction component in order to avoid bias as it is a stationary variable. That is, if we difference an I(0) variable in the model, the differences induce an auto-regressive process in the residual.

4. Migration shows recurrent negative results in housing demand equations. One explanation of this could be that in-migrants tend to demand cheaper houses. As they increase their market share, the average price of transactions falls.