A research proposal about house prices  in  the UK 

Area and context of research:

The dissertation  aims  to  find  the determinants of house prices  in  the UK  from 1980  to  2008.  It  also  seeks  the  relationship  between  house  prices  and fundamental  factors  such  as:  real  disposable  income,  interest  rates, unemployment rates, and population, and to find out whether there was a price bubble  in  the  housing  market  during  that  period.  Understanding  the determinants of house prices is very important as expenditure on new homes is a  key  component  of  consumption  and  aggregate  demand  and  the  house  is  the major  asset  for  most  households.  Collapse  in  house  markets  may  lead  to economic  crisis  as  has  just  happened  in  the  USA.  There  are  many  previous studies which have  tried  to  explain  the  relationship between house prices  and fundamental  factors  in many  countries  such  as:  the  USA,  Central  and  Eastern Europe,  Australia.  They  found  that  some  fundamental  factors  have  significant impact on house prices whilst some do not. Moreover,  the sign and significance of the relationship would be different depending on country, method, economic circumstance  and  period  of  time.  This  dissertation  tries  to  explore  the  factors that affect UK house prices, the significance and the sign of their relationship  in the period 1980-2008. Literature review: Gert, B.   and Mihaljek, D.  (2007) Determinants of House Prices  in Central and Eastern Europe. Comparative Economic Studies. vol. 49,  iss. 3, pp 367-389 This  study,  which  has  the  same  main  goal  as  my  dissertation,  used  the quantitative  method  to  find  the  relationship  between  house  prices  and fundamental  factors  such  as:  disposable  income,  interest  rates,  housing  credit, demographic  factors  and  financial  institution,  housing  quality.  The  study suggested  that  house  prices  are modelled  by  the  basic  theory  of  demand  and supply. The key factors that determine the demand for housing are house prices, disposable income, demographic and labour market factors, the expected rate of return  on  housing,  housing  quality  and  other  demand  shifters.  Financial regulation and growth of bank  credit also play a  role  in affecting house prices, which  was  reflected  by  a  housing  boom  in  the  late  1980s  in  the  period  of financial  liberalisation  in  the  UK.  On  the  other  hand,  supply  of  housing  is  a function  of  house  price,  as  is  the  real  cost  of  construction.#p#分頁標題#e#

 From  these  two equations,  the  function of  house  prices will  be  detectible. However,  the  article suggests that house prices fluctuate significantly due to the variation of demand and supply side  factors and key elasticities  tend  to be higher  in small countries than  in  large ones.  In  order  to  find  the  relationship  between house  prices  and fundamental  factors,  the  study  created  a  specific  equation which  explains  the relationship  between  real  house  prices  and  real  interest  rates  and  real disposable  income. Then, one by one,  it added other variables which represent remaining  fundamental  factors  to  avoid  muliticollinearity.  Income,  housing credit, population, labour force, real wage, and deregulation in housing financial institutions have a positive relationship with house prices whilst  interest rates, unemployment, equity price are negatively correlated with house price.   Abelson, P. et al (2005) Explaining house prices in Australia: 1970-2003. The Economic record. vol. 81, iss. special, pp.96-103 This paper also focused on the  factors affecting house prices, which  is the same as  the  objectives  of  my  dissertation.  This  study  focused  on  house  prices  in Australia  in  the  period  1970-2003.  However,  unlike  other  studies,  they developed  different models which  separate  short  and  long  term movement  of house  prices.  Their  models  were  called  long  run  equilibrium  and  short  run asymmetric  error  correction  models.  Moreover,  they  cover  the  lagged, speculative effect and other disequilibria  in housing market. The approach was based  on  the  idea  that  long  run  house  prices  are  determined  by  fundamental factors such as real disposable income, consumer price index and that the short run house prices may fluctuate around the equilibrium position but continue to readjust  to  the  equilibrium  position.

 However,  the  readjustment  process  is quicker when  house  prices  are  rising  rather  than  falling  or  flattening  because house buyers  tend  to buy when prices are rising with  the  fear  that  they will be higher  in the  future. The study supported the  theory that  in the  long run house prices  are  strongly  affected  by  real  disposable  income,  unemployment,  real interest  rates,  equity  prices,  CPI  and  supply  of  housing  and  all  the  sign  of variables are the same as expected. In the short run, this paper found significant time  lags  in  adjustment  to  equilibrium  and  the  time  of  adjustment  is  varied depending on the movement of house prices.  Jacobsen, D. and Naug, B. (2005) What drives house prices. Economic Bulletin. vol. 76, iss. 1, pp 29-42. This  paper  tried  to  answer  two  questions  similar  to  those  of my  dissertation, which  is  finding what  the most  important  fundamental  factors of house prices are, and examining whether  there  is a house price bubble  in housing market.  It found  that  interest  rates,  housing  construction,  unemployment  and  household income are the most fundamental factors of housing markets. The study did not find  the  relationship  between  household  debt  and  house  prices  and  between house prices and population and demographic  factors.  It also  found  that higher interest  rates will  lead  to house prices  falling more  in  the  short  term  than  the long  term  due  to  the  delay  of  people  purchasing  houses  and  vice  versa.  This study  also  provided  an  approach  to  examining  whether  house  prices  were overvalued by  suggesting  that  if  some of  the price  rises  in  the past  reflected a bubble,  it would be  shown by  the  instability of  the  coefficient of  interest  rates and other  factors  in the model. OECD (2005) suggested that house prices  in the UK  were  overvalued  by  30%  in  2003/04  as  a  result  of  the  so-called  housing bubble.  However,  Muellbauer  and  Murphy  (2008)  suggested  that  the  high housing price in 2003/04 was not due to the bubble effect but to strong growth of  income,  high  population  growth  and  the  result  of  high  demand  and  lack  of supply  of  housing  in  the  UK  since  1997.  This  approach will  be  applied  in my dissertation  to  examine  whether  there  is  a  price  bubble  in  the  UK  housing market. #p#分頁標題#e#
 
 Grandner, T. and Gstach, D. (2006) Joint adjustment of house prices, stock prices and output towards short run equilibrium. Bulletin of Economic Research. vol. 58, Iss. 1; pp. 1-14 This paper focused on the determinants of house prices, as do my dissertation’s objectives;  it provides a closer  look at  the adjustment of house prices  following an exogenous policy shock.  It  found  that  the volatility of house prices  is higher under monetary  policy  shock  than  it  is  under  fiscal  policy.  The  expansionary fiscal policy has negative correlation with house prices whilst the expansionary monetary  policy  increases  house  prices.  Therefore,  in  order  to  have  a  clearer picture  about  the  determinants  of  house  prices,  money  supply,  taxation,  and government spending should be added to my dissertation’s model.  Wong, T. and Hui, C. and Seabrooke, W. (2003) The impact of interest rates upon housing prices: an empirical study of Hong Kong’s market. Property Management. vol. 21, iss. 2, pp 153-170 Many  previous  studies  have  agreed  that  interest  rates  are  a  key  factor  that determines  house  prices,  thus  this  paper  tried  to  provide  a  closer  look  at  the effect of interest rates on house prices in Hong Kong  from 1981 to 2001. It was believed  that  reducing  interest  rates would  lead  to  higher  house  prices  in  the future;  however,  this  relationship was  found  non-existent  in  Hong  Kong  after 1997.   The  reason was  that  the  relationship of  interest  rate and house price  is different  depending  on  the  consumers’  expectations. The  relationship  between house prices and  interest rates  is positive  in  inflation and negative  in deflation. One of the most important implications of this study is that low interest rates do not always lead to higher house prices when real prices are declining due to the weak expectation and the delay of buying houses. Hence, besides  interest rates, consumers’ expectation plays a key role in determining house prices and should be  included  in  my  dissertation’s model  in  order  to  produce  a  more  accurate conclusion. 

Levin, E. and Wright, R. (1997) The impact of speculation impact of speculation on house prices in the United Kingdome. Economic Modeling. vol. 14, iss. 4; pp. 567-585 This paper  focused on  the  factors  that affect house prices, which are  similar  to the  goal  of my  dissertation;  however,  this  paper  provided  a  closer  look  at  the effect  of  speculation  on  house  prices.  It  concentrated  on  existing  homeowners who  intend  to move  to  a  new  higher  quality  house.  If  there  is  expectation  of rising house prices  in  the  future,  there will be a gap between  time of purchase and  time  of  sale  because  house  movers  would  want  to  secure  their  right  of purchase and delay the timing of the sale of their old house. The present value of past  growth  in  house  prices  was  added  into  the  regression  model  as  people expect a change  in prices  in  the present based on past changes  in house prices. The  study  found  that  the  excess  demand  of  housing  due  to  speculation would lead to an  increase  in house prices. However, the paper suggested that only the higher house prices increased whilst the lower quality house prices fall because people tend to move to higher quality houses. #p#分頁標題#e#

  Research question/hypothesis: The main question of the dissertation is finding the determinants of house prices in the UK in the period 1980-2008.  The main question can be broken down into smaller questions such as:  - Whether  the  main  fundamental  factors  such  as  real  disposable  income  per capita,  interest  rates,  unemployment  rates,  population,  new  build,  average household  size,  real  residual  investment,  age  profile  of  population,  growth  in mortgage credit, consumer expectation, housing stock, and housing policy have impacted on house prices. -Finding  the  relationship  and  significance  between  house  prices  and  each fundamental factor. -What are the most fundamental factors influencing house prices? -Whether expectation plays a role in determining house prices. -Whether house prices in the UK in the period 1980-2008 were overvalued.   Method and data to be used: The dissertation will use quantitative methods to answer the main question. The Ordinary  Least  Square  (OLS)  regression  model  will  be  used  to  find  the relationship between house prices and fundamental factors and test hypotheses to  answer  the  questions  above. The model  is  based on  the  standard  variables, which  have  been  used  in  previous  literature.  The  left  hand  side  (dependant variable)  will  be  house  price  index  and  the  right  hand  side  (independent variable)  will  include:  real  disposable  income  per  capita,  interest  rates, unemployment  rates,  population,  new  build,  average  household  size,  real residual  investment,  age  profile  of  population,  growth  in  mortgage  credit, consumer expectation,  housing  stock,  and housing policy. The dummy  variable will be used for housing policy variables at which time of policy was carried out and will be put as 1 and otherwise, it will be 0. 

Proposed charter structure:
1.  Abstract: summary of the dissertation
2.  Introduction: 
- Background of the topic (the trend of house prices, the state of economy,
brief discussion of the trends of interest rates, population)
-  Introducing  the  topic,  aims,  and  objectives:  finding  the  factors
determining house prices in the UK, period 1980-2008
- The  important motivation of  the  topic: expenditure on new homes  is a
key component of consumption and aggregate demand  #p#分頁標題#e#
-  Economic  theory:  the  determinants  of  house  prices  are  basically  the
theory of demand and supply 
3.  Literature  review:  overview  and  discussion  compare  and  contrast
previous  studies, explain why  they are  relevant  to my  study.  Identifying
the main question and breaking it down into the smaller questions 
4.  Research methodology: OLS  regression model, explain dummy variables
used for housing policy, data needed to be obtained and the sources.
5.  Finding and discussion: analyse and discuss the findings and compare the
previous studies. 6.  Conclusion:  summary  of  the  findings,  evaluate  the  effectiveness  of  the
research, suggest and recommend for future research
7.  Reference: 
Reference:
Abelson, P. et al (2005) Explaining house prices in Australia: 1970-2003. The
Economic record. vol. 81, iss. special, pp.96-103
 
Gert, B.  and Mihaljek, D. (2007) Determinants of House Prices in Central and
Eastern Europe. Comparative Economic Studies. vol. 49, iss. 3, pp 367-389
 
Grandner, T. and Gstach, D. (2006) Joint adjustment of house prices, stock prices
and output towards short run equilibrium. Bulletin of Economic Research. vol. 58,
Iss. 1; pp. 1-14
 
 Jacobsen, D. and Naug, B. (2005) What drives house prices. Economic Bulletin.
vol. 76, iss. 1, pp 29-42.
 
Levin, E. and Wright, R. (1997) The impact of speculation impact of speculation
on house prices in the United Kingdome. Economic Modeling. vol. 14, Iss. 4; pp.
567-585
 
Wong, T. and Hui, C. and Seabrooke, W. (2003) The impact of interest rates upon
housing prices: an empirical study of Hong Kong’s market. Property Management.
vol. 21, iss. 2, pp 153-170 www.400190.com
 
Muellbauer, J. and Murph, A. (2008) Housing market and the economy: the
assessment. Oxford Review of Economic Policy. vol. 24, iss. 1; pp. 1-34