The often volatile behaviour of UK house prices between  and  is analysed in an annual econometric model. Theory suggests that financial liberalisation of mortgage markets in the s should have led to notable shifts in house price behaviour. The evidence supports the predictions of theory, suggesting shifts took place in wealth effects, as in the consumption function, and that real interest rates and income expectations became more important. The presence of transactions costs suggests important nonlinearities in house price dynamics. The paper also contains an explicit econometric treatment of expectations, demography, supply spillovers from the rented sector and of composition biases in the official house price index.* We are grateful for comments, on earlier versions to the referees and to Janine Aron, Andy Chesher, Nick Coote, Mike Dicks, Steve Martin, Geoff Meen, Penelope Rowlatt, Neil Shephard and seminar participants at Bristol, Dublin, NERA and Oxford. David Hendry is due special thanks for unfailing help over the years this research has been in gestation. Responsibility for errors, however, lies with the authors. We are grateful to Rebecca Emerson, Sebastian Galiani and, especially Gavin Cameron for skilled research support. This research was financed in part by ESRC programme grants R   and R  .[  ]" The small size of this adjustment is explained by the fact that the Department of the Environment house price index is mix-adjusted and so captures major features of quality change.

The consumption behavior of U.K., U.S., and Japanese households is examined and compared using a modern Ando‐Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral, and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S., but not Japanese, households has undergone large shifts since 1980. The average consumption‐to‐income ratio rose in the U.K. and U.S. as mortgage down‐payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is similar in the U.S. and U.K. In Japan, land prices (which proxy house prices) continue to negatively impact consumer spending. There are negative real interest rate effects on consumption in the U.K. and U.S. and positive effects in Japan. Overall, this implies important differences in the transmission of monetary and credit shocks in Japan versus the U.S., U.K., and other credit‐liberalized economies.

Most US house price models break down in the mid‐2000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub‐prime mortgage boom) from house price‐to‐rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first‐time home‐buyers. Incorporating a measure of credit conditions – the cyclically adjusted loan‐to‐value ratio for first‐time buyers – into house price‐to‐rent ratio models yields stable long‐run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

No abstract

No abstract