Global Cities and Local Challenges: Booms and Busts in the London Real Estate Market

Alessandra Canepa,Huthaifa Alqaralleh,Emilio Zanetti Chini

doi:10.1007/s11146-020-09802-4

Abstract

In this paper we investigate the dynamic features of house prices in London. Using a generalized smooth transition model (GSTAR) we show that dynamic symmetry in price cycles in the London housing market is strongly rejected. We also show that the GSTAR model is able to replicate the features of the observed cycle in the simulated data. Further, our results show that the proposed model performs well when compared to other linear and nonlinear specifications in a out-of-sample forecasting exercise.

Highlights

During the last few decades economic systems have been characterized by a high degree of globalization
The question we address in this paper is: Do the real estate prices at the top end of the housing market exhibit different dynamics from that of houses located in other neighbourhoods of the city? In other words, does an explicit treatment of global investment need to be accounted for when modelling the top end of London’s real estate market? Favilukis et al (2013) suggest that real estate in global cities constitutes a class of asset substitutes for low-yielding government bonds and it is one in which private-equity firms, investment trusts and individual investors tend to invest
In this paper the generalized smooth transition model proposed in Canepa and Zanetti Chini (2016) is applied to house price series to investigate the asymmetrical behaviour of house price cycles in London

Summary

Introduction

During the last few decades economic systems have been characterized by a high degree of globalization. The literature on urban studies supports the view that the process of internationalization in financial and service sectors has created “global cities” or world cities (see, for example, Sassen 1991; Dehesh and Pugh 2000). These cities are “global hubs” which are instrumental in supporting the operation of the global financial and trade systems. The city of London has long been considered a global metropolis (see for example Sassen 2003).

Objectives

Results

Discussion

Conclusion