Consumption & Housing Prices

McGreal, Brown & Adair (2010) state that "housing is a multi-dimensional commodity embracing both consumption and investment; hence, the price asked for a property (list price) or a price achieved (sale price) reflect not only the attributes of the property." They indicate the tension within the house market due to competing interests, which in-turn affects the prices. As an investment, housing markets are susceptible to cycle, featuring bubbles of booms and busts.

Source: ONS (2009) & Nationwide (2013)

The UK bubble began to form around 1998, but saw a slight decline between 1999-2000. Following this the boom really began, but growth rate began to slow down, which indicated a possible economic denial between 2003 & 2004, but 2006/2007, the bubble burst. A study produced in 2009 by 4 individuals, Razio P. Attanasio,W Laura Blow,Z Robert Hamilton and Andrew Leicester using housing price growth & consumption growth proposed 3 hypotheses; house price increases, increased household wealth & consumption; house price growth reduced constraints on debt due to increased collateral for homeowners and house prices and consumption are linked by common factors. This sounds very similar to the American bubble. You’d think they would have learnt from the British seeing as the UK bubble burst a few years before.

Source: ATTANASIO, ORAZIO P. et al. (2009)

Cambell and Cocco (2007) and Attanasio, et al. (2009) found in their findings that owner-occupiers who intend to remain in their accommodation for a prolonged time were hedged against price fluctuations because they weren't exposed to the buyers’ market. However, this meant that first time buyers couldn't afford housing which was the case during the bubble.

 

Notes:

1: GDHI (Gross Disposable Household Income)

References:

Attanasio, O.P., Blow, L., Hamilton, R. And Leicester, A., 2009. Booms and Busts: Consumption, House Prices and Expectations. Economics, 76(301), pp. 20-50.

McGreal, S., Brown, L., & Adair, A. (2010). List price and sale price variation across the housing market cycle. International Journal of Housing Markets and Analysis, 3(2), 89-99. doi: http://dx.doi.org/10.1108/17538271011049731

Nationwide, 2013. Housing Price Index (HPI). 1. England: Nationwide.

Office of National Statistics, 2011. Regional Gross Disposable Household Income (GDHI) 1995-2009. 3. England: Office of National Statistics.

Sinai, T. and Souleles, N. S. (2005). Owner-occupied housing as a hedge against rent risk. Quarterly Journal of Economics, 120, 763–89.