House prices since the 1940s: Cointegration, demography and asymmetries

Abstract

Using a data set from 1939 to 1994, we are able to provide a much longer perspective on the behaviour of house prices in the UK than is common in the literature. This allows us to look at the effects of a number of factors such as real income, demography, interest rates and the housing stock over a number of business cycles and periods of low and high inflation. We find that the single most important determinant of real house prices is real income. Over the last 60 years real house prices have risen broadly in line with income. Nevertheless, there have also been protracted periods of disequilibrium associated with demographic shifts and building society lending. We also find that the adjustment of house prices to innovations in income depends upon whether real house prices are above or below the trend implied by the long run determinants of house prices. Real house prices come back towards equilibrium much more quickly when they are above the cointegrating relationship than when they are below.