A new perspective on the ripple effect in the UK housing market: Comovement, cyclical subsamples and alternative indices

Abstract

An alternative perspective is provided on the existence of a ripple effect in the UK housing market. In contrast to previous studies, the analysis involves consideration of information on the changes in house prices to which the hypothesis of house price diffusion posited by the ripple effect relates, rather than their levels. In an examination of changes in house prices in London relative to other regions of the UK, directional forecasting methods are employed to establish the extent of the relationship between geographical proximity and comovement across the three month window provided by quarterly data. Consequently, the analysis provides a direct examination of the ripple effect which refers to changes in prices rather than the convergence of levels which has become a feature of the empirical literature. The literature is extended further by both the application of dating techniques to perform the analysis across cycles and phases of cycles (recovery and recessionary periods) in the UK housing market, and the use of data from two alternative house price index providers. Striking results in support of the presence of a ripple effect are noted, particularly for the less commonly considered Halifax price index where the most significant results for comovement with London are exhibited by its contiguous regions. In addition, the cyclical subsamples considered indicate comovement to be greater during upturns, rather than downturns in the market. This is consistent with previous research showing London to correct, i.e. exhibit differing behaviour to other regions, during downturns.

Housing market cycles in large urban areas

“…Spatial diffusion can occur in contiguous geographical areas, but not necessarily, it may also affect discontinuous spatial territory with similar socio-economic conditions. Among other empirical works, evidence of the price diffusion effect is given in Tsai (2018) for the US, Cook and Watson (2016) for the UK, Taltavull et al (2017) for Spain. Good prudential policy requires action before the overbuilding goes too far and necessitates authorities' intervention.…”

Convergence in condominium prices of major US metropolitan areas

“…On the other hand, owners of single-family homes are more likely to recoup the expenses associated with home improvements when selling the property (Gil-Alana and . Thomas (2003), Holmes (2007), Holmes and Grimes (2008), Abbott and Devita (2012), and Cook and Watson (2016) examine the role of the Greater London and South East regions in the transmission of house price shocks across other U.K. regions. This line of research has also been expanded to other countries: Stevenson (2004, Ireland), Oikarinen (2006, Finland), Lou et al (2007, Burger and Van Rensbury (2008, South Africa), Larraz-Iribas and Alfaro-Navarro (2008, Spain), Liu et al (2008, Australia), Liu et al (2009, Australia), Shi et al (2009, New Zealand), Chien (2010, Taiwan), Hui (2010, Malaysia), Ma and Liu (2010;2013a,b, Australia), Montero and Larraz (2010, Spain), Vandeenkiste and Hiebert (2011, Euro Area Countries), Lean and Smyth (2013, Malaysia), Gupta et al (2015, European countries), and Holmes et al(2017, Francis), and Blake and Gharleghi (2018, Australia).…”

Hot Property

“…One area in the literature where spatial coefficient heterogeneity has been seriously considered in modelling the dynamics of regional house price change, is in the so-called ripple effect, where a leading location, experiences house price changes ahead of other regions. UK studies, where the leadership of London ahead of other regions has been evident for some time, include Meen (1999), Cook (2003Cook ( , 2012 and Cook and Watson (2015). US studies include Miller (2010, 2012), Holmes et al (2011), Barros et al (2012), and Chiang and Tsai (2016).…”