Area and context of research:
The dissertation research aims to find the determinants of house prices in the UK from1980 to 2008. It also seeks the relationship between house prices andfundamental factors such as: real disposable income, interest rates,unemployment rates, and population, and to find out whether there was a pricebubble in the housing market during that period. Understanding thedeterminants of house prices is very important as expenditure on new homes isa key component of consumption and aggregate demand and the house is themajor asset for most households. Collapse in house markets may lead toeconomic crisis as has just happened in the USA. There are many previousstudies which have tried to explain the relationship between house prices andfundamental factors in many countries such as: the USA, Central and EasternEurope, Australia. They found that some fundamental factors have significantimpact on house prices whilst some do not. Moreover, the sign and significanceof the relationship would be different depending on country, method, economiccircumstance and period of time. This dissertation tries to explore the factorsthat affect UK house prices, the significance and the sign of their relationship inthe period 1980-2008.
Literature review:
389This study, which has the same main goal as my dissertation, used thequantitative method to find the relationship between house prices andfundamental factors such as: disposable income, interest rates, housing credit,demographic factors and financial institution, housing quality. The studysuggested that house prices are modelled by the basic theory of demand andsupply. The key factors that determine the demand for housing are house prices,disposable income, demographic and labour market factors, the expected rate ofreturn on housing, housing quality and other demand shifters. Financialregulation 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 offinancial liberalisation in the UK. On the other hand, supply of housing is afunction of house price, as is the real cost of construction. From these twoequations, the function of house prices will be detectible. However, the article
suggests that house prices fluctuate significantly due to the variation of demandand supply side factors and key elasticities tend to be higher in small countriesthan in large ones. In order to find the relationship between house prices andfundamental factors, the study created a specific equation which explains therelationship between real house prices and real interest rates and real
disposable income. Then, one by one, it added other variables which representremaining fundamental factors to avoid muliticollinearity. Income, housingcredit, population, labour force, real wage, and deregulation in housing financialinstitutions have a positive relationship with house prices whilst interest rates,unemployment, equity price are negatively correlated with house price.#p#分頁標題#e#
Abelson, P. et al (2005) Explaining house prices in Australia: 1970-2003.The Economic record. vol. 81, iss. special, pp.96-103This paper also focused on the factors affecting house prices, which is the sameas the objectives of my dissertation. This study focused on house prices inAustralia in the period 1970-2003. However, unlike other studies, theydeveloped different models which separate short and long term movement ofhouse prices. Their models were called long run equilibrium and short runasymmetric error correction models. Moreover, they cover the lagged,speculative effect and other disequilibria in housing market. The approach wasbased on the idea that long run house prices are determined by fundamentalfactors such as real disposable income, consumer price index and that the shortrun house prices may fluctuate around the equilibrium position but continue toreadjust to the equilibrium position. However, the readjustment process isquicker when house prices are rising rather than falling or flattening becausehouse buyers tend to buy when prices are rising with the fear that they will behigher in the future. The study supported the theory that in the long run houseprices are strongly affected by real disposable income, unemployment, realinterest rates, equity prices, CPI and supply of housing and all the sign ofvariables are the same as expected. In the short run, this paper found significanttime lags in adjustment to equilibrium and the time of adjustment is varieddepending on the movement of house prices.
Jacobsen, D. and Naug, B. (2005) What drives house prices. EconomicBulletin. 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 pricesare, and examining whether there is a house price bubble in housing market. Itfound that interest rates, housing construction, unemployment and householdincome are the most fundamental factors of housing markets. The study did notfind the relationship between household debt and house prices and betweenhouse prices and population and demographic factors. It also found that higherinterest rates will lead to house prices falling more in the short term than thelong term due to the delay of people purchasing houses and vice versa. Thisstudy also provided an approach to examining whether house prices wereovervalued by suggesting that if some of the price rises in the past reflected abubble, it would be shown by the instability of the coefficient of interest ratesand other factors in the model. OECD (2005) suggested that house prices in theUK were overvalued by 30% in 2003/04 as a result of the so-called housingbubble. However, Muellbauer and Murphy (2008) suggested that the highhousing price in 2003/04 was not due to the bubble effect but to strong growthof income, high population growth and the result of high demand and lack ofsupply of housing in the UK since 1997. This approach will be applied in mydissertation to examine whether there is a price bubble in the UK housingmarket.#p#分頁標題#e#
http://www.ttc-switch.com/Thesis_Tips/Proposal/Grandner, T. and Gstach, D. (2006) Joint adjustment of house prices, stockprices 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’sobjectives; it provides a closer look at the adjustment of house prices followingan exogenous policy shock. It found that the volatility of house prices is higherunder monetary policy shock than it is under fiscal policy. The expansionaryfiscal policy has negative correlation with house prices whilst the expansionarymonetary policy increases house prices. Therefore, in order to have a clearerpicture about the determinants of house prices, money supply, taxation, andgovernment spending should be added to my dissertation’s model.Wong, T. and Hui, C. and Seabrooke, W. (2003) The impact of interest ratesupon 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#p#分頁標題#e#
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.
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
- Economic theory: the determinants of house prices are basically the
theory of demand and supply
3. Literature review: overview and discussion compare and contrast#p#分頁標題#e#
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
http://www.ttc-switch.com/Thesis_Tips/Proposal/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
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