Financial Econometrics Series SWP 2011/05. The Importance of Real and Nominal Shocks on the UK Housing Market. P.K. Narayan and S.

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1 Faculy of Business and Law School of Accouning, Economics and Finance Financial Economerics Series SWP 2011/05 The Imporance of Real and Nominal Shocks on he UK Housing Marke P.K. Narayan and S. Narayan The working papers are a series of manuscrips in heir draf form. Please do no quoe wihou obaining he auhor s consen as hese works are in heir draf form. The views expressed in his paper are hose of he auhor and no necessarily endorsed by he School or IBISWorld Py Ld.

2 THE IMPORTANCE OF REAL AND NOMINAL SHOCKS ON THE UK HOUSING MARKET Paresh Kumar Narayan and Seema Narayan Mailing Address of Corresponding Auhor Professor Paresh Kumar Narayan School of Accouning, Economics and Finance Faculy of Business and Law Deakin Universiy, 221 Burwood Highway, Burwood, Vicoria 3125 Ausralia. Telephone: Fax: paresh.narayan@deakin.edu.au

3 THE IMPORTANCE OF REAL AND NOMINAL SHOCKS ON THE UK HOUSING MARKET ABSTRACT The goal of his paper is o examine he responsiveness of he UK housing marke o real and nominal shocks. To achieve his goal, we use a srucural VAR model, based on quarerly daa for he period 1957:1-2009:4. We find ha in response o an ineres rae shock, house prices (aggregae house price and modern house price) fall sharply over he firs 4 years and do no recover o heir pre-shock level. In response o a real GDP shock, boh house prices reac in a posiive invered U-shaped manner. Finally, we find ha an inflaion shock has a U-shaped negaive impac on aggregae and modern house prices in he UK. 1

4 1. Inroducion The UK housing marke has araced much research ineres in wo main areas. There are sudies on he ripple effec in he UK house prices (see Cook and Thomas, 2003; Cook, 2005a,b; Meen, 1999) and he deerminans of UK house prices (see Sern, 1992; Hendry, 1984; Hamne, 1988; Fleming and Nellis, 1985a,b; Nellis and Longboom, 1981; MacDonald and Taylor, 1993). However, he responsiveness of he housing marke o real and nominal (moneary policy) shocks has received lile aenion in he lieraure on housing economics. Three sudies sand ou in his lieraure. Iacoviello and Minei (2003) analyse he impac of financial liberalisaion on he relaionship beween house prices and moneary policy for Finland, Sweden, and he UK for he periods 1987:2 o 1999:3, 1985:4 o 1998:4, and 1986:3 o 1999:4, respecively. Using a VAR model, hey find ha a conracionary moneary policy (a rise in ineres rae) reduces real house prices in all he hree counries. Lasrapes (2002) uses a srucural VAR model o examine he impac of money supply shocks on real house prices and housing sales. His sudy is based on monhly daa over he period January 1963 o Augus He finds ha boh house prices and housing sales increase in he shor-run in response o posiive money supply shocks. Giuliodori (2005) examines he impac of a rise in shor erm ineres raes on house prices for nine European counries, namely Belgium, Finland, France, Ireland, Ialy, he Neherlands, Spain, Sweden, and he UK, using quarerly daa for he period 1979:3-1998:4. He applies a srucural VAR model and finds ha an ineres rae rise negaively affecs house prices in hese European counries. 2

5 The goal of his paper is o re-examine he responsiveness of he UK house prices o nominal and real shocks. There are four aspecs of our work ha disinguish i from he hree sudies, which are similar in spiri, reviewed above. Firs, we consider no only real ineres rae shock, bu also idenify oher heoreically plausible nominal and real shocks ha poenially influence house prices. In paricularly, we show ineres in examining he role of inflaionary shocks and real GDP shocks in shaping house prices in he UK. Second, we consider wo ypes of house prices: an aggregae house price ha represens all ypes of houses (old, modern, and new) and prices for modern houses. This allows us o make a comparison of he relaionship beween real and nominal shocks on house prices of wo differen ypes. Third, all sudies idenified above, which have used he srucural VAR model, assume ha he underlying variables are inegraed of order one. We depar from his pracice, in ha we specifically es he variables for saionariy using srucural break saionariy es. Fourh, our sudy covers he mos recen daa. Previous sudies have no considered he pos-1999 daa. We consider he period 1957:1-2009:4, hus our sudy is seven years mos recen. Briefly foreshadowing he main resuls, we find ha in response o an ineres rae shock house prices (aggregae house price and modern house price) fall sharply over he firs 4 years and do o recover o heir pre-shock level. In response o a real GDP shock boh house prices reac in a posiive invered U-shaped manner. Finally, we find ha an inflaion shock has a U-shaped negaive impac on aggregae and modern house prices in he UK. 3

6 The plan of his paper is as follows. We explain he economeric model in secion 2. The economeric model is based on he familiar srucural VAR model. In secion 3, we idenify our esimable model and explain he heoreical framework. In secion 4, we examine daa and discuss he resuls. In he final secion, we conclude wih he main findings. 2. Economeric Model Based on he heoreical discussions (see nex secion), he vecor of endogenous variables Y HP,GDP,IR, P where HP is he real house prices, GDP is he real gross domesic produc, IR is he shor-erm ineres rae, and P is he inflaion rae. The income variable is imporan o measure he impac of real shocks, while he ineres and inflaion variables are imporan o measure he impac of nominal (or moneary policy) shocks. The imporance of he UK housing marke in moneary policy seing has already been recognised by Iacoviello and Minei (2003: 34), who poin ou ha given he imporance of housing wealh in he porfolios of households and businesses, housing markes play a key role in he ransmission of moneary policy We can begin wih a reduced form VAR model of he following form: Y Y 1... py p D 1 where p denoes he order of he VAR model, is an n 1 vecor of endogenous variables, is an n 1 vecor of reduced form residuals. We can safely ignore he deerminisic componen simply because i is unaffeced by shocks o he sysem. Then he SVAR model can be wrien as follows: 4

7 Y * 1 Y * 1... py p B 2 Here he marix A is used o model he insananeous relaionships, while he marix B conains srucural form parameers of he model. is an n 1 vecor of srucural disurbances and var srucural disurbances making up he diagonal elemens., where is a diagonal marix wih he variance of I is common knowledge in his lieraure ha shocks canno be observed direcly. This demands imposing some resricions. The common pracice is o muliply equaion (2) by 1, leading o he following relaionship beween he reduced form disurbances and he srucural disurbances: 1 3 We esimae he AB model proposed by Amisano and Giannini (1997). This allows us o wrie equaions (3) as follows: 4 3. Model and heoreical framework We impose he following resricions: HP GDP IR P * * * 1 0 * * * 1 HP GDP IR P 5 Here, HP GDP IR,, and P are he srucural disurbances; ha is, house price shocks, oupu shocks, ineres rae shocks and inflaion shocks, respecively; and HP GDP IR,, and P are he residuals in he reduced form equaions, represening unexpeced disurbances (given informaion in he sysem). 5

8 The firs equaion depics conemporaneous relaionship beween house prices and real and nominal variables. This resricion is consisen wih heory, in ha ineres raes and inflaion are likely o have negaive effecs on house prices, while real GDP, due o he wealh effec, is likely o have a posiive effec on house prices. Consider firs he relaionship beween ineres rae and house prices. When a cenral bank unexpecedly raises he shor erm ineres rae, his influence he morgage ineres rae charged by commercial banks. Thus, a conracionary moneary policy increases he cos of borrowing. This resuls in a fall in demand for housing. The high cos of borrowing also discourages consrucion of new dwellings and renovaions of exising dwellings (Giuliodori, 2005). A general fall in demand for housing, consisen wih demand heory, will resul in a fall in house prices. I follows ha a conracionary moneary policy is likely o resul in a fall in house prices. For a deailed discussion of he relaionship beween ineres rae and he housing marke, see Kau and Keenan (1980, 1981). The relaionship beween inflaion and house prices is also expeced o be negaive. If inflaion increases, oher hings being equal, real income falls. Consumers have less income o spend and save. This has a negaive effec on consumers spending paerns. Firs home-buyers, in paricular, will be discouraged o commi o a morgage in he face of declining real income. Indeed, a declining real income will no simulae consrucion aciviy. Thus, a slowdown in consrucion of new dwellings and renovaions of new dwellings is likely. 6

9 The relaionship beween real GDP and real house prices is expeced o be posiive, owing mainly o he real wealh effec. As consumers real wealh from non-real esae asses increase, hey gain greaer purchasing power for real esae asses. Thus, a rise in real wealh, accumulaed from non-real esae asses, is likely o increase he demand for housing. Consisen wih demand heory, his will resul in rise in house prices. The second equaion represens a conemporaneous response of ineres rae o real GDP and inflaion bu no o he oher nominal variables. This resricion is moivaed by he heoreical relaionship beween ineres rae and oupu. An ineres rae shock (a rise in ineres rae), a conracionary moneary policy reacion, is ofen aimed a slowing down a fas growing economy. Normally, he impac of he ineres rae rise is fel hrough he aggregae demand channel, where he negaive effec on invesmen flows on o a negaive effec on oupu. We, hus, allow oupu o respond conemporaneously o shocks o ineres rae. Friedman (1977) proposed he idea ha when mean inflaion grows here is more uncerainy abou fuure inflaion. This expecaion disors he effeciveness of he price mechanisms in opimal resource allocaion, leading o economic inefficiencies. Sub-opimal allocaion of resources has a negaive impac on oupu. We, hus, allow oupu o respond conemporaneously o shocks o inflaion. The hird equaion can be perceived as represening he Fisher (1907) hypohesis, which conends ha here is a posiive relaionship beween inflaion and ineres rae. 7

10 Consisen wih he Fisher hypohesis, we allow ineres rae o respond conemporaneously o shocks o inflaion. The fourh equaion does no allow a conemporaneous response of inflaion o any of he nominal and real variables. 4. Daa and resuls 4.1. Basic feaures of daa series We begin his secion by reporing some basic descripive saisics, namely he mean, sandard deviaion, skewness, kurosis and he Jarque-Bera es saisics for normaliy of he series (see Table 1). The daa used are real GDP, real house prices (aggregae house prices and modern house prices), shor-erm ineres rae, and inflaion. The real values are convered using he GDP deflaion, while he inflaion rae is compued from he consumer price index. The house price daa is exraced from hp:// while daa on he res of he variables is obained from he IMF publicaion Inernaional Financial saisics. The daa is quarerly, and cover he period 1957:1 o 2009:4. The series are convered ino naural logarihmic form before his analysis. We noice ha mean GDP is he highes followed by he house prices, ineres rae and CPI. Volailiy, meanwhile, is highes for ineres rae and lowes for GDP. Compared wih ineres rae and CPI volailiy, house price volailiy is relaively low. INSERT TABLE 1 Skewness is a measure of asymmery of he disribuion of he series around is mean. The skewness of an asymmeric disribuion, such as a normal disribuion, is zero. We noice ha for all series skewness is less han 0.51 in absolue erms. For he wo 8

11 house prices series and he ineres rae he skweness is posiive (has a righ ail), while for real GDP and he CPI skewness is negaive (has a lef ail). Kurosis measures he peakedness of he disribuion of he series. The Kurosis saisics around 3 for he wo house price series, while i is less han hree for he res of he series, implying ha he disribuion is peaked (lepokuric) relaive o he normal. Finally, he JB es examines wheher he series is normally disribued. Under he null hypohesis of a normal disribuion, he J-B saisic is disribued as 2 wih 2 degrees of freedom. We rejec he null hypohesis of a normal disribuion a he 1 per cen level for ineres rae, CPI and GDP, a he 5 per cen level for modern house prices and a he 8 per cen level for he house price of all houses. In Figure 1, we plo he quarerly growh raes in real GDP, real house prices, ineres rae and CPI (inflaion). Over he enire sample period, we noice ha quarerly growh rae is highes for inflaion (1.44 per cen) followed by house price (all houses) (0.82 per cen), modern house prices (0.79 per cen), GDP (0.62 per cen), and ineres rae (0.35 per cen). We considered quarerly growh raes over he mos recen 10- year period (1997:1-2009:4) and found ha he quarerly growh rae was highes for aggregae house prices (2.20 per cen) followed by modern house prices (1.01 per cen). The quarerly growh rae in GDP was only 0.32 per cen in his period, while inflaion grew a 0.51 per cen. Ineresingly, he ineres rae fell over his period a a quarerly average of 0.08 per cen. From his simple quarerly growh daa, we observe ha over he mos recen decade, ineres raes have fallen marginally and house prices have risen by more han 1 per cen per quarer in he case of modern houses and by around 2.2 per cen per quarer in he case of all houses aken ogeher. 9

12 INSERT FIGURE 1 In Table 2, we repor he correlaion coefficiens beween he variables, ogeher wih he associaed -saisics o judge he saisical significance of correlaions. We find ha he correlaion coefficien beween ineres rae and he wo houses prices is low and saisically insignifican over he period 1957:1-2009:4, while he correlaion coefficien beween inflaion and house prices is fairly high (around 0.85) and is saisically significan. Similarly, we noice a posiive (over 0.92) and saisically significan correlaion beween real GDP and house prices. INSERT TABLE Muliple srucural breaks uni roo es In his secion, we aemp o esablish he inegraional properies of he daa series. This is a crucial consideraion as i has implicaions for he form in which we esimae he proposed SVAR model. The exan lieraure, as highlighed earlier, has assumed ha he underlying variables are inegraed of order one, and have hus modelled reaed variables in heir level form in he SVAR model. We do no depend on his assumpion, raher we wan o saisically confirm ha variables are inegraed of he same order before we proceed o esimaing he SVAR model. We es for he null hypohesis of saionariy, following closely he pioneering work of Carrion-i-Silvesre (2003) and Carrion-i-Silvesre e al. (2005) ha allows for a mos 5 srucural breaks in a univariae series. Their work draws moivaion from he work of KPSS (1992). The model has he following form: 10

13 y 5 k1 k DU * k, 5 k1 k DT * k, 6 here subscrip 1,..., T ime periods; he dummy variable DTk, Tb, k for * T b,k and 0 elsewhere; and DU k, 1 for T b, k and 0 elsewhere, where T b, k denoes he k h dae of he break and k 1,..., 5. Following Kwiakowski e al. (1992), he es saisic is of he form T 2 2 LM ˆ T Ŝ 7 1 where Ŝ ˆ j 1 j denoes he parial sum process ha is obained using he esimaed OLS residuals from Equaion (1), wih ˆ being a consisen esimae of he long-run variance of. Finally, denoes he dependence of he es on he daes of he break, which is obained using he Bai and Perron (1998) procedure. We calculae specific sample size criical values hrough Mone Carlo simulaions by aking accoun of he saisically significan srucural breaks, as he criical values are influenced by he srucural breaks. The resuls are repored in Table 3. We generae finie sample criical values a convenional levels of significance and repor hem in he final column. The main finding is ha for all he five series we are unable o rejec he null hypohesis of saionariy. For he ineres rae variable, he es saisic is 0.018, which is less han he 10 per cen level criical value of 0.05; for he CPI variable he es saisic is 0.022, which is less han he 10 per cen level criical value of 0.043; for he real GDP variable he es saisic is 0.018, which is less han he 10 per cen level criical value of 0.08; for he wo house price variables he es saisics are and which 11

14 are less han he 10 per cen level criical values of and 0.058, respecively. Thus, we accep he null ha all variables are saionary a he 10 per cen level of significance. The main implicaion of our findings of saionariy is ha we can model all he variables in heir level form in he SVAR model. INSERT TABLE 3 In addiion, we noice ha wih he excepion of real GDP, all he variables are affeced by a leas hree saisically significan srucural breaks. The objecive of his exercise was o confirm he inegraional properies of he variables and no o underake a deailed analysis of srucural breaks. I is, however, obvious ha mos of he breaks are associaed wih major evens, such as he oil price shocks of he early 1970s and he lae 1970s, and he early 1980s recession Impac of nominal and real variables on UK house prices The impulse response funcions of he impac of a real GDP shock, price shock, and ineres rae shock on aggregae house prices and on modern house prices are ploed in Figures 2-7. We consruc boosrap percenile 95 per cen confidence inervals o illusrae parameer uncerainy following he approach in Hall (1992). We consider responses of up o 10 years ahead and use 1000 boosrapped replicaions. The lag lenghs of he VAR model are seleced using he Schwarz Bayesian crierion. For he model ha includes he aggregae house price, he opimal lag lengh is 7, while for he model ha includes he price of modern houses he opimal lag lengh is 10. INSERT FIGURES

15 We noice ha an ineres rae shock reduces house prices. The impac is saisically significan over he 10-year horizon. We find ha over he firs 3-4 years when he ineres rae rises, he fall in house price is fairly sharp. Afer he 4-year horizon, however, he impac ends o sabilise while i is sill negaive. Consisen wih demand heory his suggess ha when prices fall he demand for housing increases. Comparaively, we noice a slighly differen oucome repored by Giuliodori (2005). His findings sugges ha an ineres rae shock leads o a sharper fall in house prices over he firs seven years and he impac while negaive only sabilises afer 10 years. Moreover, he findings of Giuliodori and Minei (2003) are also differen. They find a much sharper fall in house price in response o an ineres rae rise. This difference in resuls is no enirely surprising and can be aribued o a number of facors, in paricular he use of differen sample sizes. Our sample size is mos recen covering he period including I should be noed ha neiher Giuliodori nor Giuliodori and Minei cover he pos-1999 period. In his ligh, our sample size is seven years more recen, and, as shown earlier, includes he ime period where he growh rae in shor erm ineres raes has been marginally negaive. The impac of posiive real shocks (real GDP shocks) on aggregae house prices and on modern house prices are ploed in Figures 4 and 5, respecively. We find ha he impac of a real shock has a saisically significan impac on aggregae house prices for he firs four-and-a-half years, while i is saisically significan for he firs four years in he case of modern house prices. Over he firs wo years, an income shock increases aggregae house prices afer which house prices end o decline bu remain posiive over he saisically significan years. 13

16 In he case of he price of modern house, while he rise in house price lass for he firs wo years, he decline in price is rapid. In sum, he impulse responses sugges ha he response of boh house prices is an invered U-shape. This implies ha he wealh effec lass for only he firs wo years. Over his period, due o he rise in income here is an increase in demand for housing, which pushes prices up. However, afer his iniial rise in demand perhaps he rise in house prices reaches a level which no longer aracs firs home buyers, hus demand begins o fall and so does prices. This hreshold reacion, according o our findings, comes abou afer around wo years from a posiive income shock. In Figures 6 and 7, we plo he responses of aggregae house prices and prices of modern houses o an inflaion shock. Two feaures of he reacion of house prices o inflaion shock are worh noing here. Firs, he impac of an inflaion shock is more persisen in he case of aggregae house prices han prices of modern houses. The impac of an inflaion shock on aggregae house prices is saisically significan over he enire 10-year period, while i is only saisically significan over he firs 6 years in he case of prices of modern houses. Second, he general behaviour of house prices is as follows. They decline sharply wih an inflaion shock over he firs wo years afer which here is a gradual rise in house prices bu he impac remains negaive in ha i is no able o recover o is pre-shock level. So, an inflaion shock has a U- shaped negaive impac on aggregae and modern house prices in he UK. 14

17 5. Concluding remarks In his paper we used a srucural VAR model o examine he relaionship beween house prices (aggregae houses and modern houses) and real and nominal shocks, namely real GDP shock, ineres rae shock and inflaion shock. We found ha when ineres rae rises, over he shor-erm he fall in house price is fairly sharp. Afer he 4-year horizon, however, while he impac ends o sabilise i is sill negaive. On he relaionship beween an income shock and house prices, we find ha over he firs wo years an income shock increases aggregae house prices afer which house prices end o decline bu remain posiive. In he case of he price of modern house, while he rise in house price lass for he firs wo years, he decline in price is rapid. The response of boh house prices, hus, is posiive invered U-shaped. Finally, our resuls sugges ha house prices decline sharply following an inflaion shock over he firs wo years. This is followed by a gradual rise in house prices bu he impac remains negaive in ha i is no able o recover o is pre-shock level. We conclude ha an inflaion shock has a U-shaped negaive impac on aggregae and modern house prices in he UK. The main implicaion of our finding is ha home affordabiliy or home ownership is crucially dependen on macroeconomic shocks, such as hose emerging from real income (real wealh effec), and he cenral banks moneary policy seing based on inflaion argeing and shor-erm ineres rae manipulaion. Our findings sugges ha cenral bank s moneary policy seing has saisically significan implicaions for he UK housing marke. Thus, ignoring his relaionship in moneary policy managemen may have implicaions for home affordabiliy in he UK. 15

18 REFERENCES Amisano, C., and Giannini, C., (1997) Topics in srucural VAR economerics, Springer-Verlag, Berlin. Bai, J. and P., Perron Esimaing and Tesing Linear Models wih Muliple Srucural Changes, Economerica 66, Bai, J., and Ng, S., (2004) A new look panel esing of saionariy and he PPP hypohesis. In D. Andrews and J. Sock (Eds.), Idenificaion and inference in economeric modelling: Essays in Honour of Thomas J. Rohenberg, Cambridge: Cambridge Universiy Press. Carrion-i-Silvesre, J.L., (2003) Break dae misspecificaion error for he level shif KPSS es, Economics Leers, 81, Carrion-i-Silvesre, J.L., Barrio-Casro, T, D., and Lopez-Bazo, E., (2005) Breaking he panels: An applicaion o he GDP per capia, Economerics Journal, 8, Cook, S., and Thomas, C., (2003) An alernaive approach o examining he ripple effec n UK house prices, Applied Economics Leers, 10, Cook, S., (2005a) Deecing long-run relaionships in regional house prices in he UK, Inernaional Review of Applied Economics, 19, Cook, S., (2005b) Regional house price behaviour in he UK: Applicaion of a join esing procedure, Physica A, 345,

19 Drake, L., (1993) Modelling UK house prices using coinegraion: an applicaion of he Johansen echnique, Applied Economics, 25, Fisher, I., (1907) The rae of ineres, Macmillan, New York. Fleming, M., and Nellis, J., (1985a) Research policy and review 2. House price saisics for he Unied Kingdom: a survey and criical review of recen developmens, Environmen and Planning A, 17, Fleming, M., and Nellis, J., (1985b) The applicaion of hedonic indexing mehods: a sudy of house prices in he Unied Kingdom, Saisical Journal of he Unied Naions, ECE3, Friedman, M., (1977) Nobel lecure: Inflaion and unemploymen, Journal of Poliical Economy, 85, Giuliodori, M., (2005) The role of house prices in he moneary ransmission mechanism across European counries, Scoish Journal of Poliical Economy, 52, Hamne, C., (1988) Regional variaions in house prices and house price inflaion in Briain, , Royal Bank of Scoland Review, 159, Hendry, D., (1984) Economeric modelling of house prices in he Unied Kingdom, in Economerics and Quaniaive Economics, Hendry, D., and Wallis, K., (eds.), Blackwell, Oxford. 17

20 Iacoviello, M., and Minei, R., (2003) Financial liberalisaion and he sensiiviy of house prices o moneary policy: Theory and evidence, The Mancheser School, 71, Kau, J.B., and Keenan, D., (1980) The heory of housing and ineres raes, The Journal of Financial and Quaniaive Analysis, 15, Kau, J.B., and Keenan, D., (1981) On he heory of ineres rae, consumer durable, and he demand for housing, Journal of Urban Economics, 10, Kwiakoeski, D., Phillips, P.C., Schmid, P.J., and Shin, Y., (1992) Tesing he null hypohesis of saionariy agains he alernaive of a uni roo: How sure are we ha economic ime series have a uni roo, Journal of Economerics, 54, Lasrapes, W.D., (2002) The real price of housing and money supply shocks: Time series evidence and heoreical simulaions, Journal of Housing Economics, 11, MacDonald, R., and Taylor, M., (1993) Regional house prices in Briain: long-run relaionships and shor run dynamics, Scoish Journal of Poliical Economy, 40, Meen, G., (1999) Regional house prices and he ripple effec: a new inerpreaion, Housing Sudies, 14,

21 Nellis, J., and Longboom, A., (1981) An empirical analysis of he deerminaion of house prices in he Unied Kingdom, Urban Sudies, 18, Sern, D., (1992) Explaining UK house price inflaion, Applied Economics, 24,

22 Table 1: Some seleced descripive saisics HPall HPmod IR CPI GDP Mean Sandard deviaion Skewness Kurosis J-B (0.0762) (0.0336) (0.0013) (0.0000) (0.0161) Noe: The probabiliy value is in parenhesis. 20

23 Table 2: Correlaion coefficiens HPall HPmod IR CPI GDP HPall 1 HPmod (336.65) IR (0.3504) (0.0247) CPI (22.814) (21.974) GDP (34.568) (33.887) Noe: The -saisics is in parenhesis. (1.5302) ( ) ( ) 1 21

24 Table 3: Model wihou a ime rend Counries Tes saisic Break dae Finie sample criical values Ineres rae 1973:1; 1982:2; : CPI 1970:4; 1981:4; : Real GDP : Real house price All :2; 1980:4; 1988:2; 1995: Real house 1975:2; 1988:2; price 1995:4 Modern Noes: We compue finie sample criical values are compued by means of Mone Carlo simulaions using 20, 000 replicaions. 22

25 Figure 1: Plo of he Log of daa series 10 Inflaion Q1 Q2 Q3 Q4 Means by Season Growh rae in GDP Q1 Q2 Q3 Q4 Means by Season Ineres rae Q1 Q2 Q3 Q4 Means by Season 23

26 House prices - All Q1 Q2 Q3 Q4 Means by Season 12 House prices -Modern Q1 Q2 Q3 Q4 Means by Season 24

27 Figure 2: Impac of ineres rae shock on house prices (all) Figure 3: Impac of ineres rae shock on prices of modern houses 25

28 Figure 4: Impac of income shock on house prices (all) Figure 5: Impac of income shock on prices of modern houses 26

29 Figure 6: Impac of price shock on house prices (all) Figure 7: Impac of price shock on prices of modern houses 27