Detecting long‐run relationships in regional house prices in the UK

Abstract

Recent developments in the analysis of cointegration in the presence of asymmetric adjustment are extended and applied to data on regional house prices in the UK. This extension is found to have a dramatic impact upon the results derived. In contrast to recent studies employing standard methods, allowance for the possibility of asymmetric behaviour results in the detection of a large number of long‐run relationships between house prices in different regions. A consistent pattern of asymmetric adjustment is observed, with reversion to equilibrium occurring more rapidly (slowly) when house prices in the South of England decrease (increase) relative to other regions. While the results derived support the existence of a ripple effect underlying the observed movements in regional house prices, the extent of cointegration uncovered casts doubt upon the recently proposed notion of weak segmentation in the UK housing market.

Keywords:

• Cointegration
• threshold autoregression
• regional house prices
• ripple effect
• asymmetry

Notes

Such augmented tests will be considered here, with a fourth order Lagrange Multiplier test applied to all testing equations to ensure the absence of serial correlation.

The data are obtained from the Nationwide Building Society and represent mixed‐adjusted observations measured in nominal terms on all types of property in the UK.