Efficiency and Seasonality in the UK Housing Market, 1991–2001*
| DOI | http://doi.org/10.1111/j.1468-0084.2006.00163.x |
| Date | 01 June 2006 |
| Published date | 01 June 2006 |
| Author | Leslie Rosenthal |
Efficiency and Seasonality in the UK Housing
Market, 1991–2001*
Leslie Rosenthal
Department of Economics, Keele University, Keele, Staffs, UK
(e-mail: l.rosenthal@keele.ac.uk)
Abstract
This paper considers the informational efficiency of the UK owner-occupied
housing market over the period 1991–2001. Original small-area, monthly,
quality-adjusted house price index series are developed from raw housing
transaction observations for a number of UK counties and cities. These series
are then tested in an autoregressive setting for characteristics indicative of
weak market efficiency and seasonality. The major conclusion drawn is that
there exists little evidence to support notions of inefficiency in these markets
over the period considered.
I. Introduction
‘Our forecasts have not been for dramatic falls in house prices, but who
knows? ... anyone who thinks that they can forecast asset prices is kidding
themselves’. Rachel Lomax, Deputy Governor of Bank of England, The
Guardian, London, November 23, 2003.
The working of the housing market remains central to a number of current
and topical policy issues in the UK. The interaction of the housing market
with the wider economy has been seen as an important mechanism by
which macroeconomic factors and pressures are expressed and transmitted
*Gauthier Lanot, Robin Bladen-Hovell, Alfonso Miranda and Rodney Strachan are thanked for
helpful comments. The Nationwide Building Society kindly provided the data used in this paper;
while gratefully acknowledged, this organization remains entirely innocent of any errors and any
conclusions drawn by the author.
JEL Classification numbers: R31, R20, R10.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 68, 3 (2006) 0305-9049
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(Muellbauer and Murphy, 1997; HM Treasury, 2003a). The financing of
owner occupation has emerged as a central issue with regard to decisions
about the UK’s entry into the Euro currency zone (HM Treasury, 2003b).
The problems of ‘affordable housing’ and a claimed misallocation of the
housing stock around the regions have been cited as major obstacles to the
geographical mobility of labour within the UK (ODPM, 2003a). The UK
government has recently introduced policy initiatives to improve geographical
mobility by speeding up owner–occupier housing transactions and reducing
associated transactions costs (DETR, 1999).
Within these varied debates and considerations, the efficiency of the
housing market, especially the owner-occupied housing market, may be seen
as fundamental. We test, directly, propositions concerning the efficiency of the
UK owner-occupied housing market over the 1990s. In particular, the
predictability and seasonality of owner-occupied house prices at the local level
are examined. The existence of continuing exploitable predictability within
house price series would imply that agents within the local market have failed
in taking advantage of profitable arbitrage opportunities. With regard to
seasonality, say, for example, that a substantial price discount on house prices
is known to exist on housing sold the week before Christmas. An efficient
market requires that a sufficient number of potential buyers (and sellers)
transfer their purchases (and sales) between the rest of the year and the
Christmas season in exploiting this temporal price difference to remove both
the discount and the profitable incentives for further temporal substitution.
With regard to time-series predictability, similar arguments apply. Were next
period’s house prices predictable enough, given currently available informa-
tion, to allow profitable exploitation, arbitrage in an efficient market will
extinguish the exploitable opportunities. In the limit, no usable information
will emerge from the market and a random walk appears in the price data.
However, the mere observation of predictability of current or future house
price levels from past observations is not normally enough to justify an
inference of market inefficiency, as there can be many reasons as to why
emergent information may not be gainfully exploitable. With goods like
owner-occupied housing, there are certainly unavoidable delays, costs and
taxes involved when transactions are made, which may disallow the
possibility of arbitrage equalizing prices fully. Ultimately, it remains unclear
as to how much formal predictability may remain possible in such markets
while still being efficient for practical purposes.
For the UK, the efficiency of the housing market at the aggregate overall
level has been previously considered. One explicit study is Barkham and
Geltner (1996), who find that returns from a major property investment
company consistently lead the housing market and they therefore reject semi-
strong market efficiency. As Meen (2001) notes, general studies of the
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