Spatial aggregation, spatial dependence and predictability in the UK housing market

Abstract

Abstract Most time‐series studies of UK housing markets are carried out on national data. However, housing markets may be better characterised as a series of interconnected sub‐national markets. In this paper, we use methods taken from the spatial econometrics literature and from cointegration to explore the nature of spatial interactions in UK regional house prices and housing starts. The three central spatial issues are the extent to which markets are (a) homogeneous (b) dependent and (c) convergent, across the English regions. We find that housing starts equations are remarkably similar across regions and hence construction can be characterised as a national market. There is a high degree of spatial dependence in terms of both house prices and starts; dependence is uni‐directional in the former, but not the latter. Finally, cointegration results suggest that regional prices converge to long‐run relationships, despite major short‐term variation.