The 2007 financial crisis and the UK residential housing market: Did the relationship between interest rates and house prices change?

Chin-Bun Tse, Timothy Rodgers, Jacek Niklewski

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    9 Citations (Scopus)
    312 Downloads (Pure)

    Abstract

    This paper investigates the impact of the 2007 financial crisis on the relationship between real mortgage interest rates and real house prices. It applies a dynamic conditional correlation based methodology that uses fractionally differenced data along with controls for structural breaks and non-interest-rate related factors that influence house prices. The key finding made is that the financial crisis had a long-term structural impact on the monetary transmission relationship. For example, we find that the mean conditional correlation between house prices in England and Wales and the three-year fixed mortgage rate rose by 6.6 percentage points. Similarly, the mean correlation between prices and the standard variable mortgage rate increased 6.4 percentage points to 54%. These findings suggest to us that interest-rate-based monetary policy still has an important role to play in the housing market.
    Original languageEnglish
    Pages (from-to)518-530
    Number of pages13
    JournalEconomic Modelling
    Volume37
    DOIs
    Publication statusPublished - 2014

    Keywords

    • Financial crisis
    • Residential housing market
    • Conditional correlation
    • Transmission mechanism

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