Persistence and Cyclical Dynamics of U.S. and U.K. House Prices: Evidence from Over 150 Years of Data

46 Pages Posted: 19 Jun 2018 Last revised: 10 May 2019

See all articles by Giorgio Canarella

Giorgio Canarella

California State University, Los Angeles - Department of Economics & Statistics; University of Nevada, Las Vegas

Luis A. Gil-Alana

University of Navarra - Department of Economics

Rangan Gupta

University of Pretoria - Department of Economics

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: April 12, 2019

Abstract

This paper provides a new and unique look at the dynamics and persistence of historical house prices in the US and the UK using fractional integration techniques not previously applied to housing markets. We use annual data from 1830 to 2016 for the US and 1845 to 2016 for the UK, which provides a much longer perspective on the behavior of house prices than is common in the literature, where most empirical work uses data starting from the 1980s or later. Unlike previous research, we consider two components of persistence of house prices: the component associated with the long-run trend (i.e. at frequency zero) and the component associated with the cycle (i.e. at frequency away from zero). We find convincing evidence that in the UK, housing markets incorporate two distinct poles in house price dynamics, at the zero (long-run trend) and non-zero (cyclical) frequencies. In contrast, we fail to find evidence of cyclical persistence for the US. For the sub-samples, which account for a structural break in each series, an important difference is the asynchronous pattern of the breaks, an indication of heterogeneity in the house price dynamics of the two countries and a sign that national rather than global events have played an important role. Although the house price movements of the last decade are dramatic, the greatest structural changes in the overall nominal and real price dynamics of the UK and the US appear to have taken place much earlier, in the late 1970s and early 1980s in the UK, and in the mid-1950s and early 1970s in the US. An important result, common to the whole and sub-samples, is that long-run persistence plays a greater role than cyclical persistence in explaining the dynamics of house prices in both countries. These findings have substantial implications for policy decisions. Shocks affecting the long-run component will persist for a long time, while those affecting the cyclical component will not. Thus, policymakers should adopt stronger policies with respect to long-run house price movements to create an environment whereby housing markets can readily revert to their original trends.

Keywords: Persistence; house prices; fractional integration, cyclical behavior

JEL Classification: C22, H21, H31

Suggested Citation

Canarella, Giorgio and Gil-Alana, Luis A. and Gupta, Rangan and Miller, Stephen M., Persistence and Cyclical Dynamics of U.S. and U.K. House Prices: Evidence from Over 150 Years of Data (April 12, 2019). Available at SSRN: https://ssrn.com/abstract=3195323 or http://dx.doi.org/10.2139/ssrn.3195323

Giorgio Canarella

California State University, Los Angeles - Department of Economics & Statistics ( email )

Los Angeles
Los Angeles, CA 90032
United States

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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