An empirical analysis of the Scottish housing market by property type
| Author | Paraskevi Katsiampa,Kyriaki Begiazi |
| Date | 01 September 2019 |
| Published date | 01 September 2019 |
| DOI | http://doi.org/10.1111/sjpe.12210 |
AN EMPIRICAL ANALYSIS OF THE
SCOTTISH HOUSING MARKET BY
PROPERTY TYPE
Paraskevi Katsiampa* and Kyriaki Begiazi**
ABSTRACT
This paper studies house price dynamics of the diïŹerent property types in Scot-
land. We ïŹnd evidence of i) breakpoints around the recent ïŹnancial crisis in
three property types (ïŹats, terraced, semi-detached) and in the average house
prices, ii) volatility clustering in the detached house prices, with the CGARCH
being the optimal volatility model, iii) negative impact of the unemployment and
interest rates on house prices irrespective of the property type and positive eïŹect
of the CPI in the prices of the detached, terraced and average houses. Our
results have signiïŹcant implications for appropriate economic policy selection
and investment management.
II
NTRODUCTION
The analysis of real estate markets has long been the subject of interest in dif-
ferent economies. Housing markets have important eïŹects in an economy
through many channels. For instance, they aïŹect selling/buying prices directly
and ïŹnancial institutions indirectly through mortgage defaults. Moreover,
housing is an important asset constituting a substantial input to the total asset
of several households (Lee, 2009), while holding a twofold role through con-
sumption and investment as opposed to several other assets and commodities
(Lee, 2017). However, housing investment cannot be considered safe because
of the numerous housing bubbles all over the world, while recent crises sug-
gest a failure of the banking and ïŹnancial sectors to appropriately price hous-
ing risk (Morley and Thomas, 2016).
The most recent ïŹnancial crisis, in particular, has drawn the attention of
policymakers and investors alike towards the importance of house price
volatility (Lee, 2009) and proved the importance of housing markets to the
economy, as housing systems are related to the distribution of welfare and
wealth, and housing ïŹnance is linked to the most recent international ïŹnancial
crisis (Schwartz and Seabrook, 2009). As a result, studying house price
*The University of SheïŹeld
**Oxford Brookes University
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12210, Vol. 66, No. 4, September 2019
©2019 Scottish Economic Society.
559
dynamics is of high importance in diïŹerent markets, such as ïŹnancial, mort-
gage and housing. Moreover, analysing housing market volatility in particular
is important for policy decision-making and homeownership. Policymakers
seek a less volatile housing market to increase homeownership. Lee and Reed
(2014) found that ïŹrst-time buyer schemes support housing aïŹordability and
housing price stabilisation. In addition, Stephens and Williams (2012) high-
light the importance of stability to a socially sustainable housing market.
It has been previously shown that house prices share some properties with
ïŹnancial time series (see, for example, Dolde and Tirtiroglu, 1997; Campbell
et al., 2009; Miles, 2011a; Karoglou et al., 2013; Lin and Fuerst, 2014). Fol-
lowing the vast literature on modelling the volatility of ïŹnancial assets using
the class of Generalised Autoregressive Conditional Heteroscedasticity
(GARCH) models, recently there has been heightened interest in modelling
house price volatility employing similar methods. However, there is rather lim-
ited literature on house price volatility that focuses on speciïŹc regions, instead
of aggregate eïŹects, or on diïŹerent property types, even though there has been
evidence of discrepancies in house price dynamics and volatility clustering as
well as in riskâreturn relationships found not only across countries but also
across regions and property types.
Analysing real estate markets eïŹectively is crucial for appropriate economic
policy selection and portfolio management at both national and regional level.
Real estate has become an important part for portfolio diversiïŹcation.
Although unsafe, direct and indirect investment (through funds) in real estate
could still be considered as a relatively safer investment than other assets.
Investors who want to eliminate risk want to include assets with diïŹerent cor-
relations. DiversiïŹcation can be achieved not only among diïŹerent assets (e.g.
stocks, bonds, real estate) but also within the same asset class. For example,
Eichholtz et al. (1995) examined real estate portfolio diversiïŹcation across the
United States and United Kingdom and found diversiïŹcation potential (by
both property type and region) but did not ïŹnd a common conclusion across
diïŹerent regions and property types.
Real estate is a major part of the Scottish economy and supports the eco-
nomic activity across Scotland (e.g. investment, jobs). According to the Fraser
of Allender Institute (2018), the economic contribution of commercial prop-
erty activity is 4% of Scotlandâs economic output and is a valuable investment
for trusts and pension funds. The property market plays a key role in capital
circulation and as any market needs a social order to work properly. Apart
from an important source of tax revenue, there are also signiïŹcant spill-over
eïŹects in the whole economy. Housing is a central part of the national and
local political-economic policies in general (Aalbers and Christophers, 2014).
Nevertheless, previous studies of UK housing markets have focused mainly
on England and Wales, often excluding Scotland. Exceptions include the stud-
ies of Maclennan and Tu (1998), Miles (2011b, 2015) and Begiazi and Katsi-
ampa (2019). Interestingly, while Maclennan and Tu (1998), in their study of
UK cities, included Glasgow, as its house prices continued to rise, similar to
the rest of Scotland, and moved in the opposite direction of Bristol and Luton
560 PARASKEVI KATSIAMPA AND KYRIAKI BEGIAZI
Scottish Journal of Political Economy
©2019 Scottish Economic Society.
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