Persistence and cyclical dynamics of US and UK house prices: Evidence from over 150 years of data

Abstract

This paper provides a new and unique look at the dynamics and persistence of historical house prices in the USA and the UK using fractional integration techniques not previously applied to housing markets. Unlike previous research, we consider two components of persistence of house prices: the component associated with the long-run trend and the component associated with the cycle. We find evidence of cyclical and long-run persistence in the UK housing markets. In contrast, we fail to find evidence of cyclical persistence for the USA. For the sub-samples, which account for a structural break in each series, an important difference is the asynchronous pattern of the breaks, an indication of heterogeneity in the house price dynamics of the two countries and a sign that national rather than global events have played an important role. Although the house price movements of the last decade are dramatic, the greatest structural changes in the overall nominal and real price dynamics of the UK and the USA appear to have taken place much earlier, in the late 1970s and early 1980s in the UK and in the mid-1950s and early 1970s in the USA. An important result, common to the whole and sub-samples, is that long-run persistence plays a greater role than cyclical persistence in explaining the dynamics of house prices in both countries. These findings have substantial implications for policy decisions.