Risk–return relationships and asymmetric adjustment in the UK housing market

Abstract

This study employs an Exponential Generalized Autoregressive Conditional Heteroscedasticity-in-Mean (EGARCH-M) model to determine whether regional house prices in the UK share any of the properties associated with assets such as equities. The results suggest there is some evidence of a positive risk–return relationship as well as evidence of asymmetric adjustment, implying housing should be treated similarly to other assets, with important implications for the pricing of risk by mortgage lenders. However there are differences across the regions, which can be partially explained by using London house prices as a determinant of other regional prices and incorporating interest rates into the model.

Notes

¹ Other interest rates were also used, such as the yield on long-term Government bonds, which is usually associated with mortgage interest rates in the UK. These produced contrasting results to the LIBOR models, as those for London and the South East were significant and negative, respectively, whereas those for northern regions were insignificant. In addition, a model that incorporated the return on equities and a separate model including the exchange rate produced results that were only significant in the South East and London, suggesting the housing markets in these regions are more internationally traded than other parts of the UK. Results are available from the authors on request.