Monetary policy and bubbles in the national and regional UK housing markets

an article by I-Chun Tsai (National University of Kaohsiung, Taiwan, Republic of China) published in Urban Studies Volume 52 Number 8 (June 2015)

Abstract

Numerous studies have explained the significant correlation between monetary policies and asset pricing bubbles. This study uses data on the overall UK housing market and the five UK regions with the highest house prices to evaluate the correlation between monetary policies and pricing bubbles in the UK housing markets.

This study uses a theoretical model to verify whether monetary policies affect asset pricing bubbles. Fluctuations in house prices are classified into fluctuations related to fundamentals (the mean reversion behaviour and responses to information in the current period) and fluctuations unrelated to fundamentals (self-related behaviour).

After estimating the fluctuation behaviour of house prices through quantile regression, this study asserts that a monetary easing environment can significantly increase housing returns. The self-related phenomenon of asset returns has increased significantly and has thus continuously increased prices and formed a bubble.

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