How Efficient is the U.K. Housing Market?

Research in real estate finance and economics has been dealing with the topic of efficiency in the housing market for over 25 years, mainly for the U.S., Canada, and the U.K. Most recent research on this topic either only examines local markets based on single homes or focuses on structural, sectoral or macro economic methods and models. By contrast, our analysis focuses on univariate analysis, thereby examining the memory of the individual house price series and the information contained in the time series with respect to future house prices. To the best of our knowledge, there does not yet exist any similar study for the housing market in the U.K. built on transaction-only based indices provided by Nationwide, one of the largest building societies in the U.K. This study examines the behavior of quarterly house price changes for 13 regions in the U.K. and one nationwide index from the fourth quarter of 1973 to the fourth quarter of 2009 incorporating several cycles of both booms and downturns of the U.K. housing market, whereas the amplitude of each cycle differs by region. The conducted analysis provides empirical evidence that house price changes in the U.K. exhibit certain patterns. The results show that the return generating process of U.K. housing markets differs significantly from the theoretical model of the random walk hypothesis. The conducted tests reject the null hypothesis of a random walk for all time series of house price changes and indicate strong mean-aversion processes. Furthermore, trading strategies are implemented as a robustness check and support the findings by generating excess returns in comparison to a buy-and-hold strategy. In general, we can conclude that market participants can use the information which is contained in the time series for their forecast; also, and investors might be likely to earn excess returns by using past information in the U.K. housing market, in particular when short selling or other types of participation in downward-moving markets is allowed and accessible. The identified inefficiencies are much stronger for the southern parts than for the northern parts of the U.K.

Schindler, Felix (2010), How Efficient is the U.K. Housing Market?, ZEW Discussion Paper No. 10-030, Mannheim.