Persistence and Cyclical Dynamics of U.S. and U.K. House Prices : Evidence from Over 150 Years of Data

This paper provides a new and unique look at the dynamics and persistence of historical house prices in the US and the UK using fractional integration techniques not previously applied to housing markets. We use annual data from 1830 to 2016 for the US and 1845 to 2016 for the UK, which provides a much longer perspective on the behavior of house prices than is common in the literature, where most empirical work uses data starting from the 1980s or later. Unlike previous research, we consider two components of persistence of house prices: the component associated with the long-run trend (i.e. at frequency zero) and the component associated with the cycle (i.e. at frequency away from zero). We find convincing evidence that in the UK, housing markets incorporate two distinct poles in house price dynamics, at the zero (long-run trend) and non-zero (cyclical) frequencies. In contrast, we fail to find evidence of cyclical persistence for the US. 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 US 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 US. 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. Shocks affecting the long-run component will persist for a long time, while those affecting the cyclical component will not. Thus, policymakers should adopt stronger policies with respect to long-run house price movements to create an environment whereby housing markets can readily revert to their original trends