A preliminary investigation of northern Ireland's housing market dynamics

Bond, Derek and Gallagher, Emer and Ramsey, Elaine (2012): A preliminary investigation of northern Ireland's housing market dynamics.

Abstract

In this paper recent developments in dynamic econometric methodology are used to explore the possibility of asset bubbles in the Northern Ireland housing market. This market is interesting as its house price trajectory is quite unlike any neighbouring market. In recent years it seems to have been influenced both by the general UK market and the Republic of Ireland's housing market. The dynamics of the market are explored through univariate analysis, using sequential unit root tests and fractional integration. The findings provide an indication of the principle developments in the market and could provide the basis for further causal analysis.

• Item Type: MPRA Paper
• Language: English
• Keywords: House prices; Northern Ireland; Asset Bubbles; Sequential Unit Root tests; fractional integration; fundamental value
• Subjects: G - Financial Economics > G1 - General Financial Markets; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

References

Adair, A., J. Berry, M. Haran, G. Lloyd, and S. McGreal (2009): “The Global Financial Crisis: Impact on Property Markets in the UK and Ireland,” Report by the University of Ulster Real Estate Initiative Research Team, 1, 1–66.

Ahamed, L. (2009): The Bankers Who Broke the World. Penguin Press, New York. Baddeley, M. (2005): “Housing bubbles, herds and frenzies: evidence from British housing markets,” CEPP Policy Brief No. 02/05, Cambridge Centre for Economic and Public Policy,Cambridge, May., pp. 1–32.

Brunnermeier, M. K. (2007): “Bubbles. in L. Blume and S. Durlaug (eds),” The New Palgrave Dictionary of Economics. Oxford: Oxford University Press.

Campbell, J., and R. Shiller (1987): “Co-Integration and Tests of Present Value Models,” Journal of Political Economy, 95, 1062–1088.

Cunado, J., L. Gil-Alana, and F. P. de Gracia (2005): “A test for rational bubbles in the NASDAQ stock index: A fractionally integrated approach,” Journal of Banking & Finance, 29(10), 2633–2654.

Diba, B., and H. Grossman (1988): “Explosive rational bubbles in stock prices?,” The American Economic Review, 78, 520–530.

Dolado, J. J., J. Gonzalo, and L. Mayoral (2002): “A fractional Dickey-Fuller test for unit roots,” Econometrica, 70, 1963–2006.

Driffill, J., and M. Sola (1998): “Intrinsic Bubbles and Regime-Switching,” Journal of Monetary Economics, 42, 351–385.

Elliott, G., T. J. Rothenberg, and J. H. Stock (1996): “Efficient Tests for an Autoregressive Unit Root,” Econometrica, 64(4), 813–36.

Evans, A. (2004): Economics, Real Estate and the Supply of Land. Blackwell Science: Oxford.

Evans, G. (1991): “Pitfalls in testing for explosive bubbles in asset prices,” The American Economic Review, 81, 922–930.

Ferguson, N. (2008): The Ascent of Money. Penguin Press, New York.

Flood, R. P., and R. J. Hodrick (1990): “On Testing for Speculative Bubbles,” Journal of Economic Perspectives, 4(2), 85–101.

Frammel, M., and R. Kruse (2011): “Testing for a rational bubble under long memory,” Quantitative Finance, forthcoming.

Froot, K., and M. Obstfeld (1991): “Intrinsic bubbles: the case of stock price,” The American Economic Review, 81, 1189–1214.

Garber, P. M. (1990): “Famous First Bubbles,” Journal of Economic Perspectives, 4(2), 35–54.

Garber, P. M. (2000): Famous First Bubbles. MA: MIT Press, Cambridge.

Geweke, J., and S. Porter-Hudak (1983): “The estimation and application of long-memory time series models,” Journal of Time Series Analysis, 4, 221–237.

Gibb, K., M. Livington, V. Williams, J. Berry, L. Brown, and S. McGreal (2007): “The Northern Ireland Housing Market: Drivers and Policies,” Final Report to the NIHE., 1, 1–132.

Grossman, S., and J. Stiglitz (1980): “On the impossibility of informationally efficient markets,” The American Economic Review, 70, 393–408.

Gurkaynak, R. (2005): “Econometric tests of asset price bubbles: taking stock,” Finance and Economics Discussion Series, No. 2005-04, Board of Governors of the Federal Reserve System.

Gurkaynak, R. (2008): “Econometric tests of asset price bubbles: taking stock,” Journal of Economic Surveys, 22, 166–186.

Gutierrez, L. (2011): “Bootstrapping asset price bubbles,” Economic Modelling, 28, 2488–2493.

Hicks, F., and L. Baxter (2006): “Northern Ireland Housing and Mortgage Market Developments,” Housing Finance, 8.

Hott, C. (2011): “Lending Behaviour and real estate prices,” Journal of Banking and Finance, 35, 2429–2442.

Hurvich, C., and R. Deo (1999): “Plug-in selection of the number of frequencies in regression estimates of the memory parameter of a long-memory time series,” Journal of Time Series Analysis, 20, 331–341.

Hurvich, C., R. Deo, and J. Brodsky (1999): “The mean square error of Gweke and Porter-Hudak’s estimator of the memory parameter of a long memory time series,” Journal of Time Series Analysis, 19, 19–46.

Iacoviello, M. (2005): “House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle,” American Economic Review, 95(3), 739–764.

Iacoviello, M., and S. Neri (2010): “Housing Market Spillovers: Evidence from an Estimated DSGE Model,” American Economic Journal: Macroeconomics, 2(2), 125–64.

Kindleberger, C. (1989): Manias, panics, and crashes: a history of financial crises. Basic Books.

Kindleberger, C. P. (1996): Manias, Panics and Crashes: A History of Financial Crises, 3rd ed. John Wiley & Sons, New York.

Kleidon, A. W. (1986): “Variance Bounds Tests and Stock Price Valuation Models,” Journal of Political Economy, 94, 953–1001.

Lansing, K. (2010): “Rational and Near Rational Bubbles without Drift,” The Economic Journal, 120, 1149–1174.

LeRoy, S.F.and Porter, R. (1981): “The present-value relation: tests based on implied variance bounds,” Econometrica, 49, 555–577.

Lobato, I. N., and C. Velasco (2007): “Efficient Wald Tests for Fractional Unit Roots,” Econometrica, 75(2), 575–589.

MacKinnon, J. G. (1996): “Numerical Distribution Functions for Unit Root and Cointegration Tests,” Journal of Applied Econometrics, 11(6), 601–618.

Marsh, T. A., and R. C. Merton (1986): “Dividend Variability and Variance Bounds Tests for the Rationality ofStock Market Prices,” American Economic Review, 76(3), 483–98.

McCord, M., S. McGreal, J. Berry, M. Haran, and P. Davis (2011): “The implications of mortgage finance on housing market affordability,” International Journal of Housing Markets and Analysis, 4, 394–417.

McCord, M., D. McIlhatton, and S. McGreal (2011): “The Northern Ireland Housing Market and Interconnections with the UK and Irish Housing Markets,” Housing Finance International, 26,1, 28–34.

Muellbauer, J., and A. Murphy (1997): “Booms and busts in the UK housing market,” Economic Journal, 107(445), 1701–1727.

O’Hara, M. (2008): “Bubbles: Some Perspectives (and Loose Talk) from History,” Review of Financial Studies, 21(1), 11–17.

Phillips, P. C., and T. Magadalinos (2007a): “Limit Theory for Moderate Deviations from a Unit Root,” Journal of Econometrics, 136(2), 115–130.

Phillips, P. C., and T. Magadalinos (2007b): “Limit Theory for Moderate Deviations from a Unit Root under Weak Dependence,” in The Refinement of Econometric Estimation and Test Procedures: Finite Sample and Asymptotic Analysis, ed. by G. D. A. Phillips, and E. Tzavalis, pp. 123–162. Cambridge University Press, Cambridge.

Phillips, P. C., S.-P. Shi, and J. Yu (2012): “Testing for Multiple Bubbles,” Cowles Foundation Discussion Papers 1843, Cowles Foundation for Research in Economics, Yale University.

Phillips, P. C. B., Y. Wu, and J. Yu (2011): “Explosive Behavior in the 1990s NASDAQ: Whe did exuberance escalate asset values?,” International Economic Review, 52(1), 201–226.

Phillips, P. C. B., and J. Yu (2011): “Dating the Timeline of Financial Bubbles during the Subprime Crisis,” Quantitative Economics, 2(3), 455– 491.

Qu, Z. (2011): “A Test Against Spurious Long Memory,” Journal of Business & Economic Statistics, 29(3), 423–438.

Reinhart, C. M., and K. S. Rogoff (2009): “The Aftermath of Financial Crises,” American Economic Review, 99(2), 466–72.

Shiller, R. (1981): “Do stock prices move too much to be justified by subsequent changes in dividends?,” The American Economic Review, 71,421–436.

Shiller, R. (1984): “Stock prices and social dynamics,” Brookings Papers on Economic Activity, 2, 457–498.

Sibbertsen, P., and R. Kruse (2009): “Testing for a break in persistence under long-range dependencies,” Journal of Time Series Analysis, 30(3), 263–285.

Smith, A. (2005): “Level shifts and the illusion of long memory in economic time series,” Journal of Business & Economic Statistics, 23, 321–335.

Stiglitz, J. (1990): “Symposium on bubbles,” Journal of Economic Perspective, 4, 13–18.

Taylor, M. P., and D. A. Peel (1998): “Periodically collapsing stock price bubbles,” Economics Letters, 61, 221–228.

Tirole, J. (1982): “On the possibility of speculation under rational expectations,” Econometrica, 50, 1163–1181.

Tirole, J. (1985): “Asset bubbles and overlapping generations,” Econometrica, 53, 1499–1528.

Vargas-Silva, C. (2008): “Monetary policy and the US housing market: A VAR analysis imposing sign restrictions,” Journal of Macroeconomics, 30(3), 977–990.

Vissing-Jorgensen, A. (2004): “Perspectives on behavioral finance: does irrationalityŠŠ disappear with wealth? Evidence from expectations and actions,” in (M. Gertler and K. Rogoff, eds), NBER Macroeconomics Annual 2003,Cambridge, MA: MIT Press., pp. 139–194.

West, K. (1988): “Dividend innovations and stock price volatility,” Econometrica, 56, 37–61.

Wilcox, S. (2009): “UK Housing Review,” CIH & BSA: Coventry London.

Yin, M., and L. Jin (2012): “Detecting Bubbles in the Hong Kong Residential Property Market: An Explosive Pattern Approach,” HKIMR Working Paper No.01, pp. 1–14.