UNIVERSITY OF SOUTHAMPTON

Faculty of Business, Law and Art

Southampton Business School

Academic Year 2015-2016

MSC DISSERTATION

Macroeconomic determinants of the housing price in the

UK market from 1985 to 2015

Student registration number:28219554

Presented for MSc. International Banking and Finance Studies

This project is entirely the original work of student registration number 28219554.
Where material is obtained from published or unpublished works, this has been fully
acknowledged by citation in the main text and inclusion in the list of references.

WORD COUNT: _______

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Table of Contents
Abstract.........................................................................................................................6

Acknowledgement........................................................................................................7

1. Introduction............................................................................................................8

2. Literature review.....................................................................................................10

2.1. Outstanding milestones of the UKs housing market.......................................10

2.1.2 During and post-crisis.................................................................................12

2.2 The law of supply and demand in housing market...........................................16

2.3 Demand and supply factors driving the housing price......................................19

2.3.1 Demand-side factors: Income.....................................................................19

2.3.2 Demand-side factor: Monetary policy.........................................................20

2.3.4 Demand-side factor: Inflation......................................................................21

2.3.5 Demand-side factor: Wealth push from stock market................................22

2.3.6 Demand-side factor: Demographic and unemployment factors.................22

2.3.7 Supply-side factor: Land price....................................................................24

2.3.8 Supply-side factor: Construction cost.........................................................25

2.3.9 Supply-side factor: Monetary policies.........................................................25

3. Methodology...........................................................................................................26

3.1 Vector error correction model (VECM)..............................................................26

3.2 Augmented Dickey Fuller Test (Unit root Test)..................................................28

3.3 Johansen cointegration test..............................................................................28

3.4 Variance decomposition and impulse responses test.......................................29

3.5 Software............................................................................................................30

4. Empirical analysis...................................................................................................31

4.1 Data sources and description............................................................................31

4.2 Result from Stationary test................................................................................35

4.3 Result from the Johansen Cointegration test....................................................37

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 4.3 Result from VECM.............................................................................................39

4.3.1 Long-term estimates of house price...........................................................39

4.3.2 Short-run estimates of housing price..........................................................43

4.3.3 Model evaluation.........................................................................................44

4.4 Variance decompositions results......................................................................45

4.5 Impulse response functions result....................................................................48

5. Conclusion..............................................................................................................53

5.1 Main findings.....................................................................................................53

5.2 Practical implications and limitation and opportunity for future studies............54

Reference...................................................................................................................56

Appendices.................................................................................................................61

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List of tables

Table 1: Data description and descriptive statistic.....................................................32

Table 2: Unit root test result........................................................................................35
Table 3: Johansen Cointegration test.........................................................................37
Table 4: Long-run coefficients from VECM.................................................................39
Table 5: Coefficient of error correction term and significant short-term parameters. .42
Table 6: Results from variance decomposition for the housing price.........................45

List of figures

Figure 1: The average house price in the UK from December 1999 to December
2008 (Nationwide/Halifax, 2009)................................................................................10
Figure 2: The index of monthly average house price in the UK from September 2007
to December 2008 (Nationwide and Halifax, 2009)...................................................12
Figure 3: The amount of outstanding mortgage balance in the UK based on main
lenders from December 2002 to December 2008 (Alastair Adair, 2009)...................13
Figure 4: The average UK house price by country from January 2005 to April 2016
(Official for National Statistics, 2016).........................................................................14
Figure 5: Equilibrium in the housing market in the short-term and long-term............17
Figure 6: The relation between house price appreciation and the UKs economy
growth from 1990 to 2010 (HM Treasury Pocket Book Data Series, 2010)...............19
Figure 7: Forecast of population change by regions in percentage in the UK from
2012 to 2022. (Office for National Statistics, 2014)....................................................22
Figure 8: The graph of cointegration vector...............................................................41
Figure 9: Graph illustrates the stability test of the VECM...........................................44
Figure 10: The results from impulse response function.............................................49

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Abstract

Although decades passed, the housing market has always been at the center of both
scholar and empirical studies. The topic even attracts more public attention recently
because of an interesting finding of the linkage between the housing market and
financial crisis across many countries. Accordingly, many argue that an overheating
and unreasonable appreciation of the housing price might be an early signal for a
burst of the housing bubble which could subsequently trigger an economic crisis.
Having known the importance of the housing market to the economy, there have
been numbers of attempts to investigate which factors affect the housing price,
especially macroeconomic indicators such as income, monetary policies, inflation,
cost of construction, unemployment rate, wealth push from stock marketThough
the studies on this area are various from the developed to the developing
economies, the work on the UK market is quite limited, particularly the ones
employing Vector Error Correction Model (VECM) which is considered advantageous
over other methods in finding relationship between two or more variables in not only
the short-term but also long-term. Therefore, by using VECM, this study expects to
highlight the dynamic linkage between the UKs housing price and those factors
above in both the short and long-run. The findings from the model then indicate that
over the long-run, apart from gross domestic production (GDP) carrying the negative
sign, base interest rate, construction cost, house rent price, money aggregate supply
(M2) significantly and positively affect the housing price. Meanwhile, in the short-
term, house price itself, construction cost, house rent price, except for CPI have
positive impacts on the housing price. The result from variance decomposition test
furthermore suggests that it is the shock to the base interest rate and its own
housing prices are the main explanations for the variability of the UKs housing price
whereas that of others are not noticeable.

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Acknowledgement

First of all, I would like to send enormous gratitude to my supervisor Doctor Mamata
Parhi who has always given a dedicated and supportive guidance to me during the
whole three months of dissertation process. Without her guidance and constructive
critique, I myself cannot go and complete such a long journey. Many thanks are also
due to Doctor Tapas and Professor Richard Werner for their interesting and amazing
lectures about the financial econometrics and credit theorem in the banking industry.
That knowledge truly triggers my curiosity and excitement to explore more about the
financial world as well as become main materials for my master dissertation
afterward.

Also, I would love to send my sincere thanks to Hoang Duc Nguyen, Hoang Nguyen,
Hoang Long Thinh, Tung Nguyen, Dai Do Nguyen, Vu Kinh and many other
international classmates of 2016 in the University of Southampton for a load of
unforgettable memories we had together. You are the best things which happen to
me over one year living in the UK. Even now, you still surprise me every day by your
kindness, talents and your sense of humour, of course.

Last but not least, a particular gratitude must be due to Mom, Dad and my family in
Viet Nam. I cannot thank you enough for everything you gave me for a whole year.
This is the most beautiful time I have ever had so far. Thank you so much for letting
me be myself, always pushing me out of my comfort zone and reminding me of trying
no matter what happens.

All of you truly made my year and changed me into a whole new person who now
lives confidently and much more positively.

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 1. Introduction

Over a decade of research in almost different forms of economy from the developed
to emerging ones, the housing market has still stirred public concern about its
importance to the whole economy. Most of the papers, therefore, pay attention to find
what determinants affect to the housing price and particularly focusing on the
macroeconomic factors. In particularly, some claim that real GDP, monetary policies
including the credit availability, interest rate, money supply, unemployment rate, cost
of construction, Consumer Price Index (CPI) as well as the house rent index are
found to have a close relationship with the housing price in the long-term (Adams
and Roland, 2009) (Goodhart and Hofmann, 2008). Regarding this topic, though the
result from both scholar and empirical studies are sufficiently available for many
countries over the world, there is a shortage of work in the UK's context for the
recent period. As a result, this research hopefully could shed some light on the UK's
housing market and identify whether to find any linkage between the housing price
and those macroeconomic indicators above. Especially, when the UK's housing
market has witnessed a plenty of the Government's efforts to boost both its demand
and supply sides, for example loosening the lending criteria for lending institutions
before the worldwide financial crisis 2007-2009 and launching Help-to-Buy scheme
in 2013. The result from this study, therefore, also expects to provide some
recommendations for policy makers so that they can have a better overview of what
should be done in the future to create a favourable housing market for residents
specifically and improve the health of economy, generally.

Furthermore, during the course of study, it is interesting to find that the almost
empirical works in the UKs housing market are based on the Vector Autoregression
model (VAR). However, the model itself does not allow the users to measure the
dynamic relationship among the variables in the long-term. Therefore, to address the
limitation, this study then employs the VECM which is evaluated as the effective
method to estimate the linkage existing between two or more variables in not only
the short-term but also the long-term (Kuo and Chen-Yin, 2016). Also, to my best
knowledge, this research is probably the first one using this method to examine the
relationship between the macroeconomic indicators and the housing price in UKs

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market. In which, the macroeconomic determinants being examined include GDP,
CPI, house rent index, construction cost, money aggregate supply, base interest
rate, unemployment rate. More specifically, the period chosen to empirical
examination is from the first quarter of 1985 to the fourth quarter of 2015 so that the
VECM has sufficient dataset to result in the best possible output and the conclusion
could be up-to-date with the current UKs economic context.

The framework of this research is structured as the follows.

Section 2: Literature review discusses further relevant theories related to the

housing market, the determinants of the housing price and their impacts in the short-
run and long-run periods. Besides that, a brief of vital importance of the housing
market to the UK's economy is also reviewed and thereby it can give an overview
picture of how UK's housing market looks like before and after the global financial
crisis from 2007.

Section 3: Methodology part continues to introduce the theoretical basement of the

main regression model VECM and other examinations such as stationary test,
Johansen Cointegration test, variance decomposition as well as impulse response
tests.

Section 4: Empirical analysis: firstly, discusses in details how the variables are
selected and then presents the results from each single test from the stationary test
to the VECMs outcome and the following inference examinations including variance
decomposition, impulse response test.

Section 5: Conclusion summarizes the results, assesses the limitation of the

research and recommend further space for future studies.

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2. Literature review

2.1. Outstanding milestones of the UKs housing market

In order to have an accurate interpretation of which drivers affect the housing price in
the UK over the studied period, it is crucially important to understand thoroughly the
context surrounding this special market and its main patterns of development. The
following part, therefore, discusses briefly the most standing trends and events of the
UK housing market from 1985 up to the end of 2015.

2.1.1 Pre-crisis period

Before the crisis in 2007, it can be said that the housing market contributed an
important role in the model of economic growth in the UK. The increase in the value
of resident property even compensated for the stagnating earnings and hence
enhanced the level of consumer spending for the whole country (Hay, 2013). Indeed,
because a house is the most valuable property in most of the household's wealth, it
makes sense if they are said to have a huge impact on the economy. In the boom of
economy in 2006, the rate of homeownership in this country is one of the highest in
the world. The figure in 2006 was approximately 80% relatively to 50% in France.
Back to the golden time of the UKs resident property market, the pre-crisis period
witnessed an incredible rise in the house price for a long period. Since December
1999 to December 2007, the statistic of average house price provided by Nationwide
and Halifax showed a significant increase from 107,000 to 119,000. Meanwhile,
the figure provided by the Nationwide went up from 75,000 at the end of 1999 to
more than 180,000 at the end of 2007. The index by Halifax even presented a
steeper growth rate for the same period with the price increasing from 77,000 to
196,000 (Figure 1).

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Figure 1: The average house price in the UK from December 1999 to December
2008 (Nationwide/Halifax, 2009)

The extraordinary growth rate of housing market above could be explained by the
synergic combination of many factors ranging from low interest rate, constraints in
the supply of housing stock to the high rate of employment. However, the central of
such a high growth rate was the expansion of credit for the residential mortgages.
During the boom of housing market in the UK, in order to take advantage of a surge
in housing market, many lending institutions are motivated to relax their lending
criteria so that more and more mortgage products could be provided and in turn
bring them a huge source of profitability. Unsurprisingly, the credit expansion created
more opportunities for a much wider proportion of population in the UK to own a
house (Alastair et al., 2009).The loan to income ratio was also extended and allowed
the house buyers to easily approach to a higher level of housing finance.
Additionally, another noticeable point continuing to fuel the growth rate of UKs
housing market is a dramatic expansion of Buy-to-let mortgages. Introduced to the
public for the first time in 1996, Buy-to-let loan is defined as an agreement by which
a lender agrees to provide a borrower with a loan to purchase a resident property in
order to rent it out rather than live in. Since then, this kind of special mortgage has
rapidly developed and had a huge impact on the growth rate of housing market in the
UK. According to the report by Council of Mortgage Lenders (CML), the volume of
buy-to-let loans increased substantially by 21% over the year 2006. The statistics by

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CML also pointed out that over 2005, the Buy-to-let mortgages even went up by 48%
in the quantity and 57% in the total value (Rob, 2014)

The overheating growth of the residential housing market, however, was also
associated with many social and economic issues. On the one hand, it further
expanded the gap between different regions in the UK when the high price of
resident property in for example London or Southeast area results in a greater focus
of wealth in the capital (Berry, 2015). On the other hand, it also pushed the banking
system at the risk of default because of its risky speculative activities and mortgage
lending, particularly in the housing market. Also, a great attention paid to lending on
mortgages at the cost of productive loans prompted a fear of housing bubble and
concern about housing affordability for the youngers, low-income households.

2.1.2 During and post-crisis

A number of papers have recorded a lot of cases of financial crisis which are usually
the consequences of the boom and burst of a great bubble in the housing market.
Over a decade of research on the UK's resident property market, many analysts
foresee that a fall soon occurred due to an unsustainable increase in house price.
However, in fact, it was even worse than their forecast (Alastair et al., 2009) Together
with a series of interest rate increase by Bank of England over the period from
November 2006 to July 2007 to cool off inflation in the commodity prices, global
financial crisis ultimately resulted in a slowdown of the houses price in the third and
fourth quarters of 2008 (Alastair Adair, 2009). The economy downturn combined with
high rate of unemployment and a credit crunch exacerbated the UK residential
housing market. The monthly index by Nationwide recorded a continuous decrease
in the average house price for 14 months from November 2007 to December 2008.
Accordingly, the average house price fell significantly by nearly 20% from 184,723
to 153,048 in November of 2007 and December of 2008 respectively. Likewise, the
figure provided by Halifax also presented the same downward trend over the similar
period (Figure 2).

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Figure 2: The index of monthly average house price in the UK from September 2007
to December 2008 (Nationwide and Halifax, 2009)

The fallout from the global financial crisis and the slump of housing market
intensified the negative impacts on residential mortgage. In 2008, the gross amount
of mortgage loans declined dramatically to 257.6 billion or by 29% compared to that
of 2007. The statistics from CML also revealed that the volume of loans approved for
buying resident properties experienced a noticeable decrease by 501,000 in 2008
(CML, 2010). In addition, the dominance lenders in the UK (including banks, building
societies and other specialist lenders) also witnessed a high growth rate of the
outstanding mortgage balance. It can be seen from the figure below, the total value
of mortgage outstanding almost doubled over 6 years. Particularly, dramatic
development of other specialist lenders (OLS) rather than banks was attributable to
the increase of mortgage outstanding balance above.

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 Figure 3: The amount of outstanding mortgage balance in the UK based on main
lenders from December 2002 to December 2008 (Alastair Adair, 2009)

In response to the negative impacts on the housing market, the Government's

intervention has been put in place to support and improve mortgage lending
activities. In particular, since 2010, several policies became effective and had some
certain impacts to the market. These included the temporary stamp duty holiday for
the first time purchasers offered in 2010, the First Buy policy to offer the first-time
buyer a chance to buy newly-built house in 2011 and the scheme to encourage the
lending activities from banks, building societies known as Funding for lending in
2012 (PWC, 2013). In particularly, in 2013, the policy named "Help-to-buy" was
introduced to the public for the first time. The package worth of 3.5 billion was
expected to help about 74,000 buyers and break the stagnation of the construction
industry in this country. Although the effectiveness of these policies above has been
at the central of mixed arguments, their immediate positive signals in the housing
market could not be denied. Home Builder Federation (HBF) recently revealed that
since the start date, there were 4000 new houses reserved for the first-time buyers
within only two months. Also, the most recent Market housing index further confirmed
that the first stage of Help-to-buy boosted the market significantly (Treasury et al.,
2015)

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 Figure 4: The average UK house price by country from January 2005 to April 2016
(Official for National Statistics, 2016)

As can be seen from the graph, the housing market in the UK has been being picked
up and showed some signals of recovery. The average house price went up to
209,000 in April 2016, which was 16,000 higher than the figure in April 2015. In
which, the main contributor to that increase came from England, where the house
price rose by roughly 40% in April 2016, compared to April 2009. Following the
increase in the average price, there was a consecutive increase in the number
lending approvals for resident property purchase and this, in turn, led to a rise in the
volume of housing transactions (HMRevenue&Custome, 2016). The statistics from
HM Revenue Customs showed that there was a steady improvement in the number
of residential property transactions since December 2008. Although the figure
experienced an up and down in the following years, there was a slow but steadily
upward trend in generally. Particularly, in March 2016, the housing market even
witnessed the highest volume of housing transactions over the last ten years,
reaching a peak of nearly 180,000 (HMRevenue&Custome, 2016). It can be denied
that such Governments interventions have had some certain positive impacts on the

14
UK housing market in the short-term, however, there are some arguments
questioning their effectiveness in the long-term. (Mervyn, 2013) and IMF (2013) have
both argued that the Government should stop Help-to-Buy scheme in the next three
years to avoid distortion of resident mortgage as well as the housing market. The
reason behind the view is due to the fact that those Government's control so far has
focused on stimulating the demand of the UK housing market with not much notice of
the supply side. This, according to the warning from many analysts (PWC, 2013)
could increase the house price beyond the real value for a long time and worsen the
housing affordability in this country.

2.2 The law of supply and demand in housing market

Unlike the capitalistic market where all resource allocations are decided by the
central government, in the market economy, these allocations are all the results from
interaction between the sellers and buyers. Therefore, it can be said that they rather
than authorities are forces to determine the price and quantity of goods and services
in the economy. Regarding the price determination, it should remain questionable
without the appearance of demand and supply theory. Accordingly, the price level for
a given product could be determined for almost markets available by simply finding
the intersection point between the supply and demand schedule (Robert and Marc,
2010). The housing market, which has recently attracted a lot of public attention,
therefore is not an exception. By a little modification, the supply and demand
framework could be used to identify the housing price at any given time. In contrast
with other products analysed as flow variables, the principle of supply and demand
applied to housing market should be interpreted in term of stock variables. Indeed,
theoretically, when people purchase goods or services, they buy newly produced and
not owned ones. However, if someone goes for a house, they have more choices
between newly constructed and the previously occupied houses. As a result, when it
comes to interpretation of supply and demand relationship which then identifies the
price level, it is the best way to consider houses as "stocks" whose price is
determined at a specific time (Robert and Marc, 2010). Following the rule of supply
and demand, housing market equilibrium could be found at the point where the
house quantity of demand is equal to that of supply. However, this special market
hardly maintains its ideal state of equilibrium, in fact. Because the supply and

15
demand curves always change over time thereby it leads to an excess or a surplus
in the housing market and then affects directly to its price.
Regarding housing price adjustment in the short-term and long-term period, one
thing should be paid attention thoroughly. That is a time lag between the housing
demand and supply in short-term. Dating back to a long time ago, traditional
economists often build up the models of housing market based on the assumption
that this special market clear instantaneously (Mahalik and Mallick, 2011). In other
words, the price is believed to respond immediately to any changes in the market
thereby the housing demand could be equivalent to the supply at any point in time
(Mahalik and Mallick, 2011). However, time passed and things changed. Recent
studies have introduced an opposite point of view against their precedents.
Specifically, it is claimed that if any change in the market occurs then, in the short-
term, the housing demand rather than the supply will interact with that. Or only the
demand response with the changes in market condition while the supply is assumed
to be fixed in the short time. The reason is due to the fact that any new construction
project needs time to be planned and completed therefore cannot response
immediately in a short period. Take the change in future expectation of housing price
for a specific example. It is common sense that there is a relatively immediate
increase in demand if people believe that the housing market will boom in the future.
However, in the short time, such a rise in the housing demand cannot be followed by
an immediate increase in the supply. Because as mentioned before, it takes time for
newly constructed houses to be built then provided for the market. Consequently, it
creates a disequilibrium on the market then affects the market price and in this case
leads to an increase in the housing price.
In order to explain and clarify the price adjustment in the short-term and long-term,
many attempts have been made to express it in the equations. For example, in 1984,
an equation is introduced by Henry to present the existing housing stock (Henry,
1984). Accordingly, the volume of housing stock could take the form of the following:
H t =( 1 ) H t 1+ A t

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It can be seen that the existing housing stock above denoted by Ht is expressed by

t1
its own previous stock and adjusted by the dwelling depreciation ( as well as
H

the volume of houses completed ( A t . Because the number of completed houses

is relatively smaller than the total current housing stock, the supply is considered as
inelastic and only the demand is driven by exogenous factors in the market and
determine the housing price (Hendry, 1984).The conclusion is graphically illustrated
by the graphs below:

Figure 5: Equilibrium in the housing market in the short-term and long-term.

From the graphs above, in the short-run, given a fixed housing supply at H and the
equilibrium point at (H, Ph1), any price level under the Ph1 results in a surplus in
demand. By contrast, any level of price above Ph2 leads to an excess of housing
supply. Also, the first graph once again proves that if there is any shift in demand
curve from D1 to D2 then the stimulus short-term impact on the price is an
immediate increase from Ph1 to Ph2. However, in the long-run, the inelasticity of
housing supply cannot remain anymore (Geoff, 1998). Because, for example, if a
sudden rise demand resulting in an increase in the housing price, the construction
companies are all aware of the potential profitability and therefore jump into the

17
market to build and supply more houses to exploit the opportunity. This case is
visually presented by the second graph above where the point Ph* is the intersection
point between the housing supply S0 and the vertical axis. Also, it stands for the
price level at which generates normal profit for construction companies. Given these
assumptions, it is observed that if there is any increase in price above the Ph* which
is due to a rise in the demand (from D1 to D2) then construction firms would be
motivated to produce more. Especially, when the market is perfectly competitive
which means the supply curve is completely elastic over the long-term and no entry
barriers exist, the process of new construction will continue till the real housing price
comes back to the Ph* or initial equilibrium (Geoff, 1998). Briefly speaking, for a long
time period, the housing demand no longer determines the price but the quantity if
the supply curve is perfectly elastic.

2.3 Demand and supply factors driving the housing price

From the interpretation of the supply and demand principle above, a conclusion
drawn is that variation of the housing price could be explained by the both the
demand and supply sides. Therefore, in order to identify which factors, have power
to determine the housing price, the analysis of both supply and demand factors
should be at the centre of attention. In fact, there are numerous studies which have
explored the possible determinants of house price in different countries around the
world from the view of macroeconomics. These have incorporated many variables,
for example: GDP annual growth rate, demographic structure, lending activities from
banking system, personal income, interest rate, inflation, foreign direct investment,
stock market index, and others (Mikhed and Zemcik, 2009); (Rapach and Strauss,
2009); (Robert, Karl and John, 2005); (Tsatsaronis and Zhu, 2004). The following
section thus summarizes the results from previous studies and expect to provide a
theoretical foundation to structure a good regression model afterward.

With the respect to factors driving the demand side of the resident property market,
numerous papers have provided both literature and empirical explanation for the
variation of house price in the UK. To be more specific, those factors are discussed
in details as follows:

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2.3.1 Demand-side factors: Income

This is one of the most common explanation for the variation of the housing market
in not only the developed market but also the emerging market. According to Hay
(2013), there is a strong relationship between changes in the UK housing market and
the economys growth rate. Specifically, an appreciation of the housing price tends to
move along with the output growth of UKs economy. This linkage is also graphically
presented clearly by the figure 6 as bellows.

Figure 6: The relation between house price appreciation and the UKs economy
growth from 1990 to 2010 (HM Treasury Pocket Book Data Series, 2010)

Also, another proxy of income pushes is preferred to be used along with GDP growth
rate is the disposal income. In 1997, Holly and Joness empirical research points out
that the real income is the variable which has the highest explanatory power in the
model of determining house price in the UK (Holly, 1997). The conclusion is
supported by numerous papers after that. Correspondingly, house price is committed
to be positively correlated with disposal income and GDP growth rate. According to
their explanation, an increase in the real income or growth rate of GDP will result in a

19
higher demand for houses. It, in turn, will lead to a decline in the number of housing
stock and an appreciation of house price subsequently (Hibers et al., 2008);
(Jacobsen and Naug, 2005); (Barot and Yang, 2002).

2.3.2 Demand-side factor: Monetary policy

As mentioned in the previous section, the Government after the financial crisis has
implemented several monetary policies to improve the downturn of the housing
market. Those have focused mainly on supporting the lending activities for home
buyers by injecting money into banking systems and other lending institutions with
"Help-to-buy" scheme. Therefore, it can be said that monetary policy could provide a
good variable to explain the variation of the housing market. As discussion by Ben
and Mark, the housing market could possibly be affected by two channels (Ben and
Mark, 1995). The first one concentrates on the impacts of monetary policy on the
borrowers balance sheet. Meanwhile, the second further stresses the effect of the
monetary policies on the lending activities of financial institutions. An empirical study
by Xu and Chen (2012) when examining of possible monetary policy proxies in
China housing market recently finds that an increase in money supply growth rate, a
decrease in interest rate and a lax in requirement of mortgage down payment intend
to cause a house price inflation after that (Xiaoqing and Tao, 2012). Furthermore, the
role of monetary push with house price variation is also confirmed again through
various studies (Barksenius and Rundell, 2013),(Adam and Roland, 2009).
Specifically, Barot and Yang (2002) explore a linkage between the real house price in
the UK and the real interest rate. It is subsequently followed by the research of
Hilbers et al. (2008) whereby the dual impacts of real interest rate in European
housing market is presented clearly. That is, the real interest rate is found to be able
to impact on the mortgage rate which represents for financing cost of home buyers
and risk-free rate which indicates the opportunity cost. In the following year, an
investigation conducted on the sample of 15 countries also shows another evidence
that there is a relation between the long-run interest rate and the demand side of the
housing market. Accordingly, the demand for houses changes if the long-term
interest rate witnesses a rise (Adam and Roland, 2009).

20
2.3.4 Demand-side factor: Inflation

A laxity in monetary policies could result in a positive shock to the countrys inflation
and growth rate of domestic economy whereby in turn leading to an appreciation of
user costs for example house rent (Ahuja et al., 2010). House rent could be defined
as the opportunity cost or benefits lost when someone choose to buy a new house
instead of renting it. Therefore, it can be said that if the house rent increases it could
rise the demand for houses and the house price is likely to go up (Yanbing, Xiuping
and Liang, 2012). As a result, the inclusion of the variable could to some extent be a
good indicator of modelling driving factors of the UKs house price.

2.3.5 Demand-side factor: Wealth push from stock market

Also, an appreciation of stock market is another factor pushing up the house price.
Indeed, for the countries owning the biggest stocks markets like the USA, the UK,
China and Japan, its significant contribution to the whole economy could not be
denied. In term of literature, a growing of papers argues that the growth of stock
market is able to boost the development of economy (Bencivenga, Smith and Starr,
1996), (Levin, 1991). Because of such an important role in the economy, it naturally
results in an expectation that stock market's wealth could be a factor affecting
positively to the UK housing market. Similarly, an interesting research Jud and
Winkler (2012) then supports the argument above by investigating on a large-scale
sample of 130 metropolitan areas in the USA from 1984 to 1998. Correspondingly,
they find a highly positive linkage between the appreciation of stock market with
current and lagged house price index. Along with many papers studying in the
developed countries, Mikhed and Zemcik in 2011 once again confirm the effect of
stock market index to the housing market in India an emerging economy from 1996
to 2007. Their empirical model concludes that over 10 years of a fast-growing
economy, the stock market and housing market are perfectly integrated which in turn
implies a strong relationship between the two markets.

21
2.3.6 Demand-side factor: Demographic and unemployment factors

Regarding demographic driver, this factor is considered to be one of the most vital
elements driving the residential property market (Holly, 1997) (Nathalie et al., 2006);
(gert, 2007). In similarity with many countries over the world, the UK market is also
facing a house price inequality in different areas. While the house price in London
and South East has come out top, the price is much lower in other areas, for
example, Scotland and Wales. Specifically, based on the statistics of Official for
National Statistics (2015), the most expensive areas are London and South East
regions with the average house price standing at 531,000 and 359,000
respectively in September 2015. There have been a number of attempts to explain
the culprit behind the phenomenon above. And one of the favourite explanations is
about the population inequality among different regions. Accordingly, whereas
London and the South East have witnessed a rise in the house price because both
areas are seeing a boom in the population growth rate, in the North, Scotland or
Wales, for example, population density is much less. The pressure on house price,
therefore, is substantially reduced. A forecast till 2020 by Tim Lyne (2014) also
reveals that the population growth concentrates on the Greater South East, with the
highest growth rate is projected in London (Tim, 2014). Accordingly, if the population
in the UK is expected to increase by 6.7% over the 10-year period then the figure of
London and East of England, as well as the South East, are forecasted to grow by
13%, 9%, and 8% respectively.
Figure 7: Forecast of population change by regions in percentage in the UK from
2012 to 2022. (Office for National Statistics, 2014)

22
In addition, the unemployment rate is considered as another factor which can be
used to explain the house price. According to Barot (1995), the statistics of
unemployment could itself present the uncertainty within the economy. As a result, it
could be an index to evaluate the state of the whole economy (Brooks, 1999).
Numerous papers, since then have found a relationship between the house price
and this indicator. Particularly, in 2012, the study shows that during a boom of the
residential property market, there is a decline in the unemployment rate. By contrast,
the rate of unemployment witnesses a rocket if the housing bubble bursts
(Barksenius and Rundell, 2012). And in term of the economys wealth aspect, the
higher unemployment rate is believed rate to result in a decline in a lower growth
rate of wage which, in turn, raises the uncertainty level of future income and directly
affects to consumers housing purchase or the housing demand, in other words
(Jacobsen et al. 2005).

So far, most of the studies on the determinants of housing price mainly focus on the
demand side, however, there has been limited attempts to investigate the supply in
the housing market. In some papers, the role of the housing supply is even ignored.
Being aware of that shortage, the research tries to collect existing reviews about the
supply-side of the housing market as many as possible and summarizes them in the
following section.

2.3.7 Supply-side factor: Land price

23
Based on a residential research by Savills (2015), a land is the main component in
building a new construction. As a result, it is believed that many problems related to
housing supply constraint could be explained by the investigation of price and
availability of land for growth of housing market. (Wu, Gyourko and Deng, 2012) also
finds that the proportion of land value in the total value of residential properties in
Beijing has increased significantly. In 2010, it even accounted for more than 60
percent of the house value, on average. In the circumstance of UK market, there is a
strong likelihood that the housing bubble during the financial crisis has is caused by
the limitation of the supply side (Taylor, 2009). Accordingly, the Governments
planning policies have been constrained the development of housing supply since
the World War II. These interventions, particularly The Town and Country Planning
Act in 1947 were based on the unrealistic assumptions that the growth rate of
population is not present and the regional policies might not enlarge the wave of
migration to the South as happening in the 1930s. However, the fact was a totally
different when the population witnessed an increase and the wave of residential
movement did not show any signal of decline. Consequently, the policy put more
constraint pressure on the housing supply in this country. In the following years, the
Planning and Compensation Act effective in 1991 continued to restrict the supply
side. It was said that the local authorities would have to spend at least five years to
consider and evaluate thoroughly any new construction project. If that project is not
in the plan, it would be rejected, no matter how fast the real housing demand
increases. After that, the Labour Government in 1997 also further limited the supply
side which worsen the shortage of residential properties in the South East when
claiming that 60% of new houses could be constructed on the brownfield sites
without any consideration of how many houses in demand in each area (Evans and
Hartwich, 2005). Unsurprisingly, the restriction in the housing supply, because of
planning laws over 50 years, together with an increase in the demand side at the
same time, led to a house price inflation, smaller house as well as frequent housing
bubbles in the UKs market (Taylor, 2009).

2.3.8 Supply-side factor: Construction cost

In addition to the land price, construction cost is also another fundamental ingredient
in the total value of a new residential property. As the discussion by Jacobsen et al.

24
(2005), the construction cost plays a vital role in determining the house price.
Likewise, the findings from a research by Adam and Roland in 2005 also claim that
the higher construction cost, the less quantity of new residential properties and the
lower the volume of housing stock. Most recently, Karols investigation finds a
mechanism to transmit construction cost in the price of the new houses in the Swiss
market (Borowiecki, 2009). He realizes that a rise in the construction expenditure
would result in a house price inflation. It, in turn, presents a transmission power from
the builders to home purchasers. From those previous reviews, it is believed that
construction cost could be a good indicator for the supply side in the UK housing
market.

2.3.9 Supply-side factor: Monetary policies

The effects of monetary policies, particularly the variable of credit availability

presented by the money supply and interest rate not only exerts their effects on the
demand side but also the supply side simultaneously. The research of Mahalik and
Mallick (2009) suggests the policy makers in India should concern about the supply-
side effects of interest rate. Because, according to their study empirical results, the
interest rate exerts much more influence on the supply side, in this case, the
behaviours of housebuilders. Known that the interest is often used by the
Government to adjust the housing inflation, an appreciation of interest rate could
slow down the demand side of housing market then results in a decrease in its price
in the short-run. However, on the supply side, the increase of interest rate also
impacts on the borrowing cost of housebuilders then their cost of construction
simultaneously which in turn reduces the supply in the long-run. Eventually, this
probably renders the housing price to go up.

3. Methodology

The following section will discuss further the approach applied to examine the
relationship between the house price and a range of macroeconomic variables. Also,
the source of data and which software used to build the model will be mentioned in
details.

25
3.1 Vector error correction model (VECM)

While the housing market could departure from its equilibrium in the short-run period,
in the long-term, the housing price is believed to adjust with the macroeconomic
fundamentals and come back to the initial status of equilibrium by the error
correction mechanism (Mikhed and Zemcik, 2009). With the aim to examine the
linkage between the housing price and a broad range of variables mentioned before
in both short and long-term, VECM, therefore is said to be a suitable approach. It is
worth noticing that this model is a restricted form or special case of Vector
Autoregressive Model (VAR) to address the problem of cointegration in the time-
series, which cannot be captured by VAR. Cointegration is defined as the
phenomenon when the financial variables are integrated of the same order but their
linear combination is stationary. That is, although the time-series might be non-
stationary but over a long time, they will move together and become stationary. This,
in turn, reflects the long-run equilibrium relationship among variables (Brooks,
2008)The fact is, in many financial theories, cointegration or long-run equilibrium is
found to hold for numerous factors. In particularly, the scholars investigate that any
deviation of those factors from the equilibrium point merely exists in the short-run.
For example, spot and future prices for a specific asset, stock price and its
dividends, term structure of interest rate, house price and macroeconomic factors.
A simple function of VECM that combines the first difference and lagged levels of
cointegrated parameters for two variables takes the form:

Equation 1: VECM structure for 2 variables

26
In which y t = 0 + 1 x t presents the equilibrium relationship in the long-term

between x t y t , while, x y are the error correction terms which reflect what

extent yt as well as x t response to the departure from the long-term equilibrium

point. The linear combination is integrated of the order 0 or I(0), the term of error
correction is stationary, in other words, if there exist a cointegration relationship

between x t y t .

In fact, VECM estimation is not limited to 2 variables only. The model can be applied
for numerous variables and has the general form as the following:

Equation 2: General form of VECM

Note that it is of important to determine the optimal number of lag lengths in order to
maximise the degree of accuracy of VECM, Augmented Dickey Fuller as well as
Johansen cointegration test. Among the available criterions to identify the
appropriate lag lengths, according to (Liew, 2004), Akaike information criterion (AIC)
is evaluated to have the best power to choose a proper number of lags. This method,
therefore, is employed to calculate the number of ideal lag lengths required. Because
of narrow space, all the results are presented in Appendix I. Accordingly, the
recommended lag length should be used in those tests above is two lags. This
output is also supported by the other criterions such as sequential modified LR test
statistics and Final Prediction error.

In order to apply VECM, the time-series, however, must satisfy a vital condition. That
is, the variables included in the regression model are non-stationary but stationary in
their difference. As a result, the need for some special data examinations arises to
investigate whether the given time series own these criteria above. The next section,
therefore briefly introduces main ideas about these tests, namely Augmented Dickey
Fuller test and Johansen and Juselius Cointegration Test.

27
3.2 Augmented Dickey Fuller Test (Unit root Test)

The examination is considered as one of common approaches to test the stationarity

of time-series. However, before discussing this method in details, the definition of
stationarity and non-stationarity should be identified properly. As described by Brook
(2008), a time series is stationary if it's mean and variance, as well as
autocovariances for each given lag, are all constant. The essence of stationary test
lies for two main reasons. Firstly, regarding the impact of a "shock", it is said that the
effects of the shock to the system will steadily fade away. It means, during the time t,
the shock has the largest impact and the effect will be smaller and smaller for the
time t + 1 as well as t + 2. By contrast, when an unexpected change in variables or
the error term's value occurs to non-stationary data, its effect is infinitely persistent.
The effect over the time t + 1 is now no longer smaller than the time t and so on.
Secondly, the stationarity is believed to cause the phenomenon of spurious

regression. The problem incurs when the R2 resulted from the regression is quite

high, but in fact, the time-series are totally independent of each other or have no
relationship at all, in other words (Clive and Newbold, 1974). These impacts above,
therefore, have resulted in the need for a test to examine the stationarity of a given
data set. The first attempt is a test recommended by Dickey and Fuller (Dickey and
Fuller, 1979). The purpose of this test is to examine the hypothesis that the time
series includes a unit root. However, the test above is criticised because of its

limitation when the residual ut is assumed to be white noise or not to be

autocorrelated. In order to address the problem, Augmented Dickey-Fuller test (ADF)

is introduced and allows inclusion of p lags of the explanatory variables to ensure the
residuals are all white noise.
With its superior advantages, ADF test thus is chosen to test the stationarity for all
variables in the regression model.

3.3 Johansen cointegration test

Although the stationarity found in the time series could lead to some statistic
problems as the discussion above, the VECM is still valid if the linear combination of
these data series is non-stationary. In other words, the variables having the

28
conintegration are able to reflect the long-run process of error correction. With the
aim to investigate the relationship between house price and some macroeconomics
in the long term, it is necessary to carry out a test to examine whether there exists
the cointegration among variables. So far, there have been a number of methods
introduced to the public, however, the most suitable approach which may capture the
long-run relationship is Johansen and Juselius test (1990). The test therefore is
applied for all variables in this study. Follow the approach, two test statistics should
be conducted to find the cointegration and more importantly identify the number of
cointegration vectors possibly existing. They are Trace test and Maximum
Eigenvalue test which take the function as the following.

Equation 3: Trace and Maximum Eigenuevalue test statistics

In which r denotes the number of cointegration vectors under the null hypothesis

whereas i hat represents for the eigenvalue of i th order estimated from the

matrix. A significant non-zero eigenvalue implies a significant cointegration vector.

The trace test is conducted to test the null hypothesis that the volume of
cointegration vector is less than or equal to r, while the alternative is there are more
than r cointegration vectors. Meanwhile, the Maximum Eigenuevalue test implements
the examination on single eigenvalue and claims the null hypothesis that the number
of vector of cointegration is equivalent to r, against the alternative hypothesis of r + 1.

Moreover, it is argued that the data set should be transformed to the logarithm of
levels if cointegration phenomenon exists. Therefore, except for the base interest
rate and the rate of unemployment which are already under the form of the
percentage, the remaining variables in this study will be converted to the logarithm
level. The coefficients, thus, could be interpreted as an elasticity.

3.4 Variance decomposition and impulse responses test

Following the Granger causality test, two other tests mentioned bellows discuss
further the dynamic relationship among the variables in the regression model.
Indeed, variance decomposition and impulse responses test are said to be effective

29
and useful tools to check the variabilitys sources (Sims, 1980). With the respect to
impulse responses test, it is said that the test is able to provide information about the
degree of responsiveness of the dependent variables in VAR to shocks to each other
variables. Specifically, assume that there is a standard unit of shock to the error term
in each individual equation, impulse response test will investigate how such a shock
impacts on the whole system. Also, it is worth noticing that the order of variable is
crucially important because it could affect the examinations result. As a result, the
Cholesky dof adjustment function in Eviews will be chosen to make sure all variables
are given in a proper order.
Besides that, variance decomposition is another measure providing the test with the
VAR dynamic system. According to Brooks (2008), the examination allows the users
to have more information about what the percentage of the movement in the
dependent parameters is explained by their own shock, compared with shock to
other variables. In term of econometrics, this test offers an approach to identify how
much of the s-step-ahead error variance forecasted of a given variable is caused by
the innovations to individual explanatory parameters. In similarity with impulse
responses test, the variance decomposition also requires all variables to be set

under a proper order. It means y1 t should be estimated first then followed by that

of y 2 t , for example.

3.5 Software

We choose to employ the Eviews 9.5 to run the statistical models and a wide range
of data tests as mentioned above. This version is the latest one and does fit the
requirements of a suitable software to handle with the time-series problems.
Furthermore, regarding the VECM which is used to find the relationship between
house price and its macroeconomic determinants, Eviews software offers many
advanced functionalities which allow further interpretations and deeper explanation.
Although Eviews is said to the most common software employed in the field of
econometrics, the users could choose a plenty of others which are able to perform
well, for example, STATA or SPSS.

30
4. Empirical analysis

4.1 Data sources and description

This section evaluates the reliability and validity of the data source. Specifically, for
each determinant, the data selection would be explained along with the literature
which is introduced before. In the literature review, the potential determinants would
be mentioned as many as possible. Yet, in fact, this study encounters with difficulty in
collecting the relevant data sources for the demographic and land price factors which
consequently leaves rooms for other future research.
To understand the relationship between house price and macroeconomic factors, the
study uses the data set based on the quarterly basis. The reason why quarterly
interval is chosen for the data series is due to its availability. Indeed, with the highest
frequency, the quarterly data used spans from 1985:1 to 2015:4. The total number of
observation for nine variables including dependent one is 1070 which satisfies the
recommendation by (Toda, 1995). That is, it is necessary to have more than 300
observations to get a reliable result from Johansens cointegration test.

For the dependent variable, the house price index (lnHPI) provided by UK Halifax will
be used during the given period. And this empirical study then conducts an
examination on total 8 potential driving factors or predictors of house price, in other
words. To be more specific, the first group of house prices determinants namely
Income factor would be presented by real gross domestic product variables
(lnGDP) collected from the National Office Statistic website. Similarly, the following
two variables stand for Monetary policy which studies its effect on house price,
including a broad money aggregate (lnM2) and national base interest rate (lnMR)
compiled by Bank of England.

Regarding the third variable, the popular measures chosen which directly affects to
housing price is the national house rent index (lnR) and Consumer price index
(lnCPI) from Office for National Statistic. Another factor possibly has the impacts on
the housing market and mentioned here is wealth from the stock market. To present
this driven, FTSE 100 UK price index (lnFTSE) designed to illustrate the

31
performance of companies across the UK will be selected. Next, for the impacts of
demographic and unemployment, this study merely focuses on the second one
because of data availability for demographic factor. And then, to test the
unemployments effect, the rate of unemployment (lnUR) compiled by Office for
National Statistic will be employed.

In similarity with the demographic factor, the data represents the land price index
based on the quarterly basis is not available, in fact.

The last factor included in the regression model and having some effects to the
housing supply is the construction cost. To test the factor, this study chooses building
cost index (lnBCI) provided by the Office for National Statistic as the explanatory
variable in the regression model.

In the table 1, the main features of eight variables are briefly discussed. With just
some basic descriptive statistics, for example, mean, standard deviation, Jarque-
Bera, and probability, those given variables are able to "speak for themselves (Paul
and Michael, 2005). Starting with the means and standard deviation, the mean value
of house price index under logarithm form is 11.48152 with a small standard
deviation of 0.521454. Likewise, the average values of lnGDP, lnM2, lnR, lnFTSE
and lnBCI which present for the variables including GDP, money aggregate, house
rent index, FTSE-100 price index as well as cost of construction are 12.44869,
13.27952, 5.421765, 8.273798, 7.347581, 4.622160 respectively with relative low
standard of deviations which ranges from roughly 0.08 to 1.99. On the contrary, the
mean values of base interest rate and the log of CPI are 7.301694, 0.780568 but
their standard deviations are comparatively large with the former of 3.450707 and
the latter of 0.726099.
Regarding the property of the normal distribution of the studied variables, Jarque-
Bera test statistic (JB) and its p-value are calculated to give the conclusion.
Basically, if the JB statistics are greater than the critical value at a given significance
level of their p-value are smaller than the given level of significance, the null
hypothesis of variables following the normal distribution is rejected. The result from
table 1 shows that except for lnHPI, lnMR1, lnCPI, lnR and lnFTSE, the rest of eight
variables does follow the normal distribution at the significance level of 10%.

32
 Table 1: Data description and descriptive statistic

Variables Descriptions Data source Mean Standard Jarq

deviation

House price Quarterly- Data Stream 11.48152 0.521454 9.5

index (lnHPI) averaged house
price in the UK
Gross domestic Quarterly- National Office 12.44869 0.436435 8.1
products (lnGDP) averaged GDP Statistic

Broad money Quarterly-basis Bank of England 13.27952 0.649513 7.0

aggregate (lnM2) broad money
aggregate
Base interest rate Quarterly-basis Bank of England 7.301694 3.450707 12
(MR1) interest rate

Consumer price Quarterly-basis National Office 0.780568 0.726099 19

index (lnCPI) CPI Statistic

House rent index Quarterly-basis National Office 5.421765 0.341691 12

(lnR) house rent index Statistic

FTSE 100 Price Quarterly-basis National Office 8.273798 0.482617 13

Index (lnFTSE) FTSE-100 price Statistic
index
Unemployment Quarterly-basis National Office 7.347581 1.989871 8.3
rate (UR) rate Statistic

33
Building cost Quarterly-basis National Office 4.622160 0.081547 8.5
index (lnBCI) construction cost Statistic
index

34
The section afterward presents and analyses the results generated from VECM and
data examination conducted on the data sample in the UK. It starts with the unit root
test (ADF) which aims to check the stationary property of nine time-series including
the dependent variables and eight explanatory ones. During the interpretation, the
process of optimal lag selection is discussed in details. ADFs outcome then is
followed by the cointegration examination namely Johansen test. It results in the
number of cointegration possibly found among variables which is a necessary
condition to structure the VECM, after that. Subsequently, when the VECM is already
conducted to illustrate the relationship between house price and its determinants in
both short-term and long-term period, impulse response test, and variance
decomposition test are applied to provide further explanation.

4.2 Result from Stationary test

As mentioned before, to use the VECM, the time-series must satisfy the condition of
stationarity property first. The ADF test therefore is selected to examine this
characteristic for total nine variables over the period from 1985:1 to 2015:4. Firstly,
the ADF test is conducted on all variable at level to examine the null hypothesis. That
is, there exist a unit root at level at a given significance level. In case, the series
contain stationarity property then the process above is once again repeated at the
first difference and would not stop until the data series are stationary. The results for
nine variables coming out from Eviews are all summarized in the following table.
 Table 2: Unit root test result

Inferenc
e on
Variabl Level First difference
integrati
es
on
ADF PP ADF PP
lnHPI -1.298528*** -1.334947*** -3.877071** -3.314613** 1
lnGDP -4.417630 -5.166447 0
lnM2 -5.180566 -4.240665 0
lnMr1 -1.817851*** -1.349182*** -8.458754*** -8.593931*** 1
lnCPI -0.457297*** -0.452776*** -4.703834*** -4.482198*** 1
lnR -3.501112 -5.804212 0
lnFTS 1
-2.289827*** -2.333238*** -11.01826*** -11.02879***
E
UR -2.337343*** -1.974637*** -2.922636** -5.116074*** 1
lnBCI -1.671129*** -1.634680*** -6.911177*** -6.923693*** 1
(Note: *** and ** illustrate that the statistics presented above are significant at the
level of 1%, 5%)

Regarding the result from ADF test, the t-statistics of the studied variables are all
greater than the critical values at 1%, 5% level of significant, with the exception of
lnGDP, ln M2 and lnR. Therefore, the null hypothesis that there exists unit root in
time-series is rejected at the 1% level. In other words, the given data sets for 6
remaining variables are non-stationary at the level of 1%. After taking the first
difference and repeat the ADF test for them, it can be seen that the t-statistics now
are all smaller than critical values. Specifically, except for that of dependent variables
(house price index-HPI) which are smaller than critical values at 5% level, t-statistics
of the others are smaller than critical values at 1% level. As a result, it can be
concluded that at the first difference, all variables are now stationary, or integrated of
the order one at 1% significance level, apart from lnHI and lnUR stationary at 5%
level. Although ADF test is one of the most common approaches to examine the unit
root of time-series, it still has some limitation. According to Brooks (2008), the test
finds difficulty in distinguishing between a unit root process and a stationary process
which is due to structural breaks when the power of stationary test is low. In order to
enhance the degree of accuracy for stationary test, Phillip and Perron test (PP)
(1988) is then employed to double check the result from the ADF test (Phillips and
Perron, 1988). In similarity with the ADF test, PP method has the same null
hypothesis and process. From the table above, it is clear that the test also generates
the same conclusion with the ADF. All of the variables are non-stationary at the level
of 1 %, (except for lnR, lnGDP, and lnM2). However, they become stationary at I(1)
at the significance level of 1%, apart from house price index (lnHI) which is stationary
at the level of 5%. Note that since three out of nine variables are found to be
stationary, namely lnGDP, lnM2 and lnR, they would be treated as exogenous in the
cointegration model. However, in the error correction equation, these 3 variables
would be considered as endogenous while the constant, as well as the error
correction term, are assumed to be exogenous.

4.3 Result from the Johansen Cointegration test

As discussed in the previous section, the second step, after stationary test, required
to employ VECM is to determine how many cointegrating vectors existing in the
model. According to the mechanism of Johansen Cointegration test, the result is
based on two likelihood factors including Trace and Maximum Eigenvalue. In term of
Trace statistics, it does reject or does not reject the null hypothesis of there is no
cointegrating vector among the variables at first. If the null hypothesis is rejected,
then the test would be repeated for one cointegrating vector. The process then
continues until the null hypothesis is no longer rejected. Denote r as the number of
cointegration vector, the table given below reports the results for both Trace and
Maximum Eigenvalue factors for the sample from 1985:1 to 2015:4. Also, notice that
the test statistics and critical value at 1% are presented in this table to increase the
accuracy of this test. The details of this test from Eviews are captured by the
screenshot in Appendix III.

Table 3: Johansen Cointegration test

Eigenvalue max Trace Cointegratio Critical Value (1%)
max Trace
n number (r)
0.472677 62.71429** 150.5636** 0 45.86900 104.9615
* *
0.315005 37.07763 87.84931** 1 39.37013 77.81884
*
0.225276 25.01430 50.77168 2 32.71527 54.68150
0.160902 17.19187 25.75737 3 25.86121 35.45817
0.073883 7.521946 8.565499 4 18.52001 19.93711
0.010592 1.043553 1.043553 5 6.634897 6.634897
Note: *** the null hypothesis rejection with a 1% significance level.

As can be seen that the Trace and Maximum Eigenvalue statistics result in different
outcome of the number of cointegration vectors among variables. With the optimal
lag length of 2, the Trace test rejects the hypothesis of no and one cointegration
vector (r=0, r=1) at the significance level of 1% while it does not reject the hypothesis
that r 2. Based on that, the conclusion is that r = 2 or there are two stationary
relationships among those variables above. Meanwhile, the outcome from Maximum
Eigenvalue reports a different number of vector. Instead of two vectors found by

Trace test, max statistic suggests that there is only one cointegration vector

between housing price (lnHPI) and its explanatory variables.

According to Kasas study (1992), it is recommended that the Maximum Eigenvalue
is able to give the users a better result, provided that eigenvalues themselves cluster
and close to 0 or 1 (Kasa, 1992). And Trace test, on the contrary, tends to be more
relevant if the eigenvalues are evenly distributed. From the table above, the
eigenvalues are all smaller than 0.5 therefore, the result from Maximum Eigenvalue
test should be used. The preference of using the Maximum Eigenvalues result is
also supported by a research of Michael R. Baye,Jon P. Nelson (2001). In which, the
Maximum Eigenvalue test is said to prefer to Trace test because it owns a sharper
alternative hypothesis (Baye and Nelson, 2001). Therefore, an appropriate
conclusion is that, among the variables, there exists at least one cointegration vector
or one stationary relationship.

4.3 Result from VECM

Based on the presence of cointegration vectors determined by Johansen test and
the number of the optimal lag length found in the previous section, a structure of
VECM showing the relationship between house price and its macroeconomic
determinants, could be written as follows:
a
1 (i ) M 2ti + + 1 (i ) HPI t i + 1 ECT t1 + 1 t

a
1 ( i ) DI ti + (1)

a
HPI t = 1+

In which is the first difference operator and ECT denotes the error correction

term from the long-run relationship, a to k stand for lag lengths and finally, 1 9

present for coefficients of error correction terms ECT t1 which is able to capture

the adjustments of HPI t .

4.3.1 Long-term estimates of house price

This subsection as follows would like to shed a light and discuss in details the factors
which have the long-term impact on the UK's housing price. From the result of
VECM, the long-run coefficients obtained from the cointegration equation are
summarized in the given table below:
The result shows that the credit supply and the interest rate affect the housing price
positively in the long-term. Regarding the credit availability, its positive response to
housing price is consistent with some previous empirical studies (Egert and Mihaljek,
2007). They all claims that the quantity of credit injected into the economy generally
and the real estate market specifically plays a noticeable role in determining the
housing price. The money supply is said to exert the influences on both the demand
and supply of housing market. In case, the positive influences on the supply side are
higher than that on the demand then the housing price tends to decline. However,
the positive sign of money supply coefficient, in this study, itself declares the
opposite result. That is, the increase in the house supply is not likely to catch up with
the rise in the housing demand thereby causing an increase in the housing price.
 Table 4: Long-run coefficients from VECM

Variables Coefficient Standard t-statistic

deviation
(lnMR1) 1.208609*** 0.25325 4.77241
(lnBCI) 19.02661*** 3.52800 5.39303
(lnR) 52.08874*** 8.95959 5.81374
(lnGDP) -60.56586*** 11.0493 -5.48144
(lnM2) 15.21610*** 5.09408 2.98702
(UR) 0.145218 0.22933 0.63324
(lnFTSE) 0.760096 0.81346 0.93440

(lnCPI) 0.569788 0.40265 1.41511

Note: *** denotes that these coefficients are statistically significant at the level of 1%.

Unlike the credit supply variable, the linkage between the interest rate and the
housing price in this study goes against the precedents (Borowiecki, 2009); (Greiber
and Setzer, 2007). Specifically, in this case, if the interest rate increases by 1% the
house price goes up by 1.21%, other variables remain unchanged. The result,
however, can be explained reasonably its the effect to supply side in the long-run. It
is commonly believed that the housing price tends to increase if the economy
witnesses an overheating development. To cool the heat off, the Government
normally tries to reduce the volume of currency circulating in the economy whereby it
can decrease the capital to reduce the inflation as well as prevent the possible
housing bubbles. The interest rate, a traditionally monetary tool, consequently will be
raised to address the problem above. This, in the long-run will impact on the
construction cost of house builders, reduce their profitability and then results in a
decline in the housing supply which consequently increases the price. Also, the
result most recently is confirmed again by the research of Barksenius and Rundell
(2012).
It is no doubt that the credit availability has positive impacts on the house supply and
then the housing price. But the supply side is also affected by many factors such as
the construction cost (lnBCI) in this model. As can be seen, its coefficient is
statistically significant at the level of 1% and owns the positive sign. It implies that an
increase in the cost of construction might lead to a decrease in the house supply
which in turn results in an appreciation of the housing price. This result is consistent
with many studies mentioned in the literature review as well as adds further
explanation why a rise in credit for housing market cannot suppress the price of
housing.

Likewise, the house rent also produces the positive effect on the housing price as
the previous studies (Yanbing Zhang, Xiuping Hua, Liang Zhao, 2012). It makes
sense that an increase in the price of houses to rent will directly affect the house
purchase decision of customers then encourage them to own a house instead of
renting from others.

While other variables have a positive impact on the housing price in the long-run,
GDP variable (lnGDP), by contrast, shows a negative linkage with it. As discussed in
the literature review, many studies have shown the evidence of a positive
relationship between two variables. A rise in the GDP might result in the upward
trend of the demand side of the housing and then house price. However, in this case,
that relationship turns out to be negative, instead of being positive. From the last
papers, GDP is often used as a proxy for the whole economy's wealth or the total
income of all individuals and entities, in other words. Therefore, when the society
gets wealthier, people tend to be more certain about their decisions of house
purchase. As a result, it could render the demand side of housing market to increase.
Because of the explanation above, it is of important and necessary to explore deeply
British spending habit on the residence property. It therefore will provide further
information about the real linkage between the GDP and the housing demand. This
is ever discussed by the research of Lu Xu and Botang (2014). Accordingly, the
renting, in the UK, is more common and sensible. Besides, British also would rather
consume their income on the traveling and education to purchasing houses with
speculative purpose as the people in some developing countries do, for example,
China. That is the reason why the GDP variable is negatively related to house price
in the long-term.

These variables discussed above are all significant at the level of 1% and do show a
noticeably statistical linkage with the house price in the long-run. Meanwhile, the final
three variables on the Table 4 including unemployment rate, FTSE-100 price index
and CPI do not present any impact on the housing price. The conclusion is based on
their t-statistics from Eviews. It is clearly seen that they are all smaller than a given
critical value of 1.645 at the level of 10%. Thus, a conclusion can be drawn that
these three variables are not statistical significant at the 10% level or they do not
have explanatory power to explain the variation of the housing price in the long-run.

Having known that the tendency of housing prices movement could be reflected
through the residuals from the long-term relationship in the model, if the
corresponding residuals witness an upward trend then it means the house price is
likely to go beyond the equilibrium point or deviate a lot from the state of equilibrium.
It can be seen clearly from the cointegration graph below, the residuals, most
recently achieved by far the highest value in 2008, which also illustrates the greatest
deviation from the point of equilibrium. In other words, it can be said that the housing
price in the UK, at that time did exceed the level what has been expected to be.
Furthermore, it is interesting to realize that points of time when the dramatic
volatilities occurred as presented in the Figure 8 reasonably match with the three big
crashes in the UK housing market, including mid-1990s, early 2000s and the global
financial crisis in 2008.

Figure 8: The graph of cointegration vector

4.3.2 Short-run estimates of housing price

The table 5 below summarises the result of error correction term (ERT) and two lags
of changes in value of all variables used in the VECM. The coefficient of ERT is
statistically significant at the level of 1% and possess a negative sign which implies
that there exists an adjustment of housing price in the short-term because of its
departure from the long-term equilibrium point. The coefficient is equal to -0.009043
indicating that the model corrects its disequilibrium level by 0.9% per one quarter.

Table 5: Coefficient of error correction term and significant short-term parameters

Variables Coefficients t-statistics

ERT -0.009043*** -3.47533
DlnHPI(-1) 0.613663*** 5.48196
DlnBCI(-1) 0.192043** 2.33536
DlnR(-2) 0.238932** 2.04506
DlnCPI(-1) -0.012551* -1.78236
R-squared 0.745587 F-statistic 12.03092***
Adj. R-squared 0.683614 S.E. equation 0.012954
Sum sq. residuals 0.013090
Note: ***, **, * denote that the coefficients are significant at the level of 1%, 5% and
10%

Because of the space constraint, the Table 6 merely presents the significant short-
run parameters. The details of other variables playing insignificant role in the short-
term are given in a snapshot from Eviews screen in Appendix III. Have a look at
them, it is found that the house price, in the short-run is determined by the historical
factor (in the previous quarters) of its own price, the construction cost, the CPI, the
house rent as well as the error correction term. Furthermore, it is found that the
2
R is equal to 0.7456 which indicates about 74.56% of the variation of housing

price in the UK is explained by the determinants in this model. The rest (25.44%) of
the housing price variation is explained by other factors which are reflected in the
residual of the system equation. The F-statistics of 12.03092 statistically significant
at the level 1 % also suggests once again that there is a noticeable relationship
between the housing price and other independent variables mentioned above.

Next, the variance decomposition and the impulse response tests are conducted to
shed further light on the dynamic property of the whole system and introduce a
measure of relative importance of the parameters over the studied period. However,
before computing these two examinations, it is of necessary to ensure the degree of
accuracy of the VECM through several required diagnostic procedures including c,
Heteroscedasticity and finally Stability test.

4.3.3 Model evaluation

Start with the Serial Correlation test, the function of Lagrange Multiplier (LM) test is
taken to examine the autocorrelation of the residuals. Correspondingly, at the lag 2,
the p-value of the LM statistic equals to 0.166 is greater than the significance level of
1%, indicating that the null hypothesis of there exists autocorrelation of the residuals
is rejected. Then, it can be concluded that the residuals from the VECM do not
witness any autocorrelation problem.

Another test computed to investigate the heteroscedasticity of the residuals is the

White test. With the p-value of the statistic of 0.4953 which is higher than the level of
1% implies the fact that there is no problem of heteroscedasticity of the residuals in
this model.

Eventually, it is also of important to test the stability of the VECM as well. Indeed, in
case the stability test cannot be passed, the result from the impulse response
examination will certainly invalid. According to Ltkepohl, the estimated VAR model
is considered stable if all roots own their absolute values (modulus) smaller than 1 or
does not lie outside the unit circle. In case of VECM model which is a restricted VAR
with K endogenous parameters and r cointegrating vectors has K-r unit eigenvalues
(Ltkepohl, 1991). Provided the modulus of those eigenvalues are all less than one,
the VECM is stable. Applying the function of AR Roots Tables and AR Roots Graph
in Eviews, the stability test is obtained as the graph bellows. As can be seen that,
none of eigenvalues stay outside the unit root circle which confirmed the stability of
the VECM.

Briefly speaking, the results from the diagnostic tests discussed above all lead to a
consistent conclusion that the VECM which has been constructed so far has fulfilled
the requirement of a reasonably accurate model.
 Figure 9: Graph illustrates the stability test of the VECM

4.4 Variance decompositions results

The variance decomposition results provide further inference on how much of

variation in housing price caused by a given shock are explained by its determinants.
With a period of 15 quarters chosen, the estimates of variance decomposition from
the Eviews software is summarized in the given Table 7 follows. The details are
shown in the Appendix IV
The result from the table illustrates that the variation of the housing price index itself
might impose the greatest effect on the variation of the future housing price. Indeed,
in the next first quarter, it even accounts for 100% of the variation which is followed
by 71.25% for 5 years ahead. More noticeably, this variation is likely to be persistent
for a long period. The evidence shows that the percentage of the housing price
variation still remains a high level of 60.66% even after the following 15 quarters.
The fact implies that in the case of the UK's housing market, any current change in
the housing price strongly is capable of affecting to the expectation of future changes
in price.
 Table 6: Results from variance decomposition for the housing price

Horiz LnHPI UR MR1 LnBC LnFTS LnCPI LnR LnGD LnM2

on I E P

1 100.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2 92.90 0.01 2.15 0.16 0.04 3.56 0.93 0.25 0.01
3 83.70 0.01 7.00 0.06 0.04 6.59 2.05 0.38 0.17
4 76.55 0.02 10.16 0.10 0.23 8.73 3.11 0.54 0.56
5 71.25 0.02 12.11 0.18 0.74 10.27 3.83 0.61 1.00
6 67.74 0.02 13.33 0.27 1.34 11.05 4.22 0.60 1.43
7 65.61 0.01 14.15 0.36 1.95 11.15 4.43 0.57 1.77
8 64.25 0.01 14.72 0.44 2.50 10.92 4.58 0.55 2.02
9 63.31 0.01 15.15 0.52 2.96 10.60 4.73 0.54 2.18
10 62.63 0.01 15.47 0.60 3.33 10.30 4.85 0.54 2.27
11 62.09 0.02 15.69 0.67 3.64 10.05 4.96 0.54 2.33
12 61.65 0.02 15.84 0.73 3.91 9.87 5.06 0.54 2.37
13 61.27 0.03 15.94 0.79 4.15 9.72 5.15 0.54 2.41
14 60.94 0.03 16.02 0.84 4.36 9.61 5.23 0.54 2.43
15 60.66 0.04 16.07 0.89 4.54 9.51 5.30 0.54 2.45
Aver
70.30 0.02 12.25 0.44 2.25 8.80 3.90 0.49 1.56
age

Although the impact of the variation of housing price itself, no doubt is by far the
greatest contributing approximately 70% of the variability on the average, there
exists more than 30% which can be explained by other eight driving factors.
Specifically, the factor coming out second and dominating other remaining ones is
the variation of the basis interest rate. Correspondingly, this contributes roughly half
of total variation caused by the rest seven determinants together. The factor, as
mentioned before is a proxy for a credit availability by which the individual,
household, other entities could borrow to finance their house purchase and thereby it
could directly affect the demand side of the housing market. A relatively high of
percentage contributing to the housing price variance, therefore, once again claims
its noticeable significance in the dynamic changes of the UK's housing price.

Another source of variation which is able to explain the changes in the behaviour of
housing price is the CPI's variance. This factor, as can be seen, accounts for
approximately 9% of the total housing price variance and about 25% of the total
variance caused by other eight determinants. The CPI then is followed by the house
rent index which accounts for 4% of the total variance confirm the importance of
inflation push to the dynamic change in housing price and also reasonably fits the
previous literature reviews. That is, once there is a change in the house rent
expense, no matter it is an increase or decrease, it will influence the behaviours of
people when deciding on whether they should buy a house or not whereby affecting
the demand as well as the housing price. It makes sense that if the expenditure on
renting becomes higher and even exceeds the total expense to own a house, the
consumers will certainly move their preference to house purchase. This
consequently raises the demand in the housing market and puts the upward
pressure on the price if the supply side, at that time, cannot satisfy the required
demand.

Also, it is worth noticing that the variance of FTSE-100 index is another factor which
has some effects to the variation of the housing price. The evidence shows that this
factor is in charge for 3.8% total of price variability and up to 10.8% of the variation
inflicted by the 8 parameters. Such a proportion not surprisingly could be explained
by the linkage between the housing market and the stock market. It is, these two
markets might be highly correlated with each other. Due to the high liquid of the
stock market, there is possibly likelihood that it will exert several impacts on the
speculative activities and investment in the housing market.
Eventually, the variation of four variables including unemployment rate, construction
cost, GDP, and money supply M2 contributes the least to the total price variance
which is equal to roughly 2%. This result indicates that the variation among four
determinants is not significant to the dynamic changes in the housing markets
behaviours.

4.5 Impulse response functions result

Despite the fact that the variance composition is able to tell us how much proportion
of variance in the housing price is caused by its driven factors, it could not identify
whether these linkages are positive or negative. Therefore, the impulse response
test is employed to further analyse the system's dynamic behaviour. It allows the
practitioners to forecast the response of housing price to different shocks in its
explanatory variables. This means that the results from the impulse responses are
capable of providing more explanation of how the housing price variable response to
one standard deviation shock in other variables.

The six figures above present the outcomes from impulse response test for the time
horizons of 15 quarters. Starting with the first figure, the findings show that one
deviation shock in the housing price increases rises its own price up to 0.03% in the
fourth quarter and since then it steadily dies out and disappears in the 15 th quarter.
The result therefore is similar to the previous findings obtained from variance
decomposition. That is, the changes in the current price might affect to buyers
expectation and this impact could possibly last over a long-term period.

When it comes to the income factor which is presented by GDP variable, it can be
seen from the Figure (b), a one standard deviation shock to lnGDP is likely to cause
the housing price to peak at 0.05% during about four quarters before declining and
fading away in the 15th quarter.

Continuing with two variables representing for the inflation factors including the CPI
and the house rent index (lnCPI and lnR), while the graph of CPI (Figure c) does not
illustrate any statistical significance, the one of the rent index (Figure d) shows some
noticeable features. To be more specific, a one standard disturbance coming from
the price of houses for rent results in a roughly -0.02% decrease in the housing price
for mere two quarters. In similar with GDP and HPI variables, it effects also
disappears since the 11th quarter. Also, note that the result is different with the
conclusion about house rent indexs short-term impacts from the VECM. Instead of
having the positive influence on the housing price, the result from impulse test
implies that the relationship between housing price and the house rent index is
negative.
Regarding the variables of money aggregate M2 and the base interest rate MR1
which are proxies for monetary policies which are illustrated by the Figure (e) and (f)
respectively, their results show varying impacts on the housing price. Specifically, a
one standard deviation disturbance originating from the base interest rate in the first
two quarters decreasing the housing price, but subsequently, the influences become
positively significant reaching to approximately 0.15% in the eighth quarters before
declining gradually in the following periods. The output is consistent with the long-
term effect of interest rate given by the VECM. However, unlike the base interest
rate, the graph from Figure (e) does not present any statistical significance of money
aggregate supplys impact to the housing price.

Likewise, with the respect to unemployment rate, it can be seen from the Figure (g),
a one standard deviation of shock in this factor exerts no impacts on the housing
market in both the short-run and long-run periods.

Meanwhile, a one standard deviation disturbance from the FTSE-100 price index in
Figure (h) produces a rise of approximately 0.01% in the housing price in the first two
quarters and steadily increases to roughly 0.02% in the fifth quarter before
disappearing gradually in the following periods.

A one standard deviation disturbance from the cost of instruction increase the
housing price over the first five periods before dying out in the next quarters. The
result from the impulse test, as can be seen, supports for the output of the VECM.
That is, this determinant is able to affect the housing price in the UK market in both
the short-term and long-term

The results from VECM, the variance decomposition and the impulse response test
of VAR might vary depending on the methods applied to find out the relationship
between the housing price and macroeconomic determinants. Indeed, whereas
some factors are not able to explain the variation of the housing price in both the
short-term and long-term periods by VECM, they are found to be significant by
variance decomposition as well as impulse response test of VAR for the following
periods. Such these divergences, therefore, leave rooms for further investigation in
the future.
 Figure 10: The results from impulse response function

(a) Response of LnHPI to LnHPI (b) Response of LnHPI to LnGDP (c) Response of LnHPI to LnCPI

(d) Response of LnHPI to LnR (e) Response of LnHPI to LnM2 (f) Response of LnHPI to LnMR1
(g) Response of LnHPI to UR (h) Response of LnHPI to LnFTSE (i) Response of LnHPI to lnBCI
5. Conclusion

This section eventually aims to summarize the objectives and fundamental findings
from the research. Besides that, its practical application and limitation are also
discussed briefly.

5.1 Main findings

The overall purpose of this study is to examine the short-term and long-term
relationship between the housing price in the UK and some typical macroeconomic
factors as well as to identify to what extent the variability of the UKs housing price
could be explained by these drivers. In particular, this research focuses on eight
following variables including GDP, CPI, the price of houses to rent, money supply
(M2), basis interest rate, unemployment rate, FTSE-100 price index and cost of
construction associated with the theory of supply-demand in the housing market. In
order to model the linkage, the VECM and variance decomposition and the impulse
response in VAR are the main techniques which are employed to give the analysis.
The study compiling the data on the quarterly basis over the period from 1985: Q1 to
2015: Q4 identifies that there exists a long-term equilibrium between the housing
price and its drivers which are GDP, interest rate (MR1), money supply (M2) and
house rent price as well as construction cost. While the long-term coefficients
resulted from the cointegrating equation presents that the interest rate, the price of
houses to let, cost of construction and credit availability (M2) all exert the positive
influences on the housing price, the unemployment rate and the wealth push from
stock market (FTSE-100 price index) do not impact the housing price. In addition, the
GDP effects against have the significant and negative effect on the housing price.
Interestingly, this finding in the UK market goes against several previous studies
which claim that GDP positively influences on the housing market (). Furthermore,
the coefficient of error correction term also implies that it is statistically significant
and owns the correct (negative) sign. This statistic finds the deviation from the long-
run disequilibrium of the housing price in the context of UK market would be
gradually adjusted in the short-run periods. Specifically, the adjustment is about
0.9% per quarter. This result once again supports my selection of the VECM as an
appropriate choice and confirms the advantages of the VECM over the VAR in
modelling the relationship between 2 or more variables in the long-run. Moreover,
paying attention to the short-term elements, they also recommend that the cost of
construction, the price of houses to let, its own housing price in the previous period
except for CPI has positive and significant impacts on the housing price. Other
studies variables contribute insignificant roles in the short-run.

With the purpose of examining the sources of variation and investigating the extent
how the housing determinants affect to the price, variance decomposition test is
employed for further interpretations. The outcome reflects that a one deviation from
the housing price itself causes by far the greatest variability in the housing prices.
More specifically, it even accounts for 100% in the first quarter then roughly 70%
after 15 periods. The rest (30%) of the variability is contributed by other 7 factors. In
which, the demand-side factor presented by the base interest rate causes around
12% of the variability and the remaining determinants explain another 18%.

5.2 Practical implications and limitation and opportunity for future studies.

The conclusions from this research hopefully provide some practical suggestion, in
term of policies for the UKs housing market in the future. In particular, regarding the
credit availability which has money aggregate supply (M2), the empirical results
indicate that in the long-run, the amount of credit injected into the housing market
possibly exert some adverse effects on the housing price and even create giant
bubbles. It might be due to most of the credit availability is benefited by the
speculators, investors oriented by the profitable opportunity rather than used to boost
the real demand for housing. Additionally, a positive relation between the base
interest rate and the housing price in the long-term also implies that a rise of the
interest rate, in the long-run could lead to a reduce in the supply then directly cause
another increase in the housing price. Furthermore, the second highest share of the
interest rate in the total variability of the housing price also claims that the role of
supply side should not be undervalued in the context of the UKs market.
This, in turn recommend the UKs Government as well as policy makers to pay more
attention to keep balance the credit availability between both the demand side which
are buyers and the supply side which are investors and builders.
Although this research contributes some useful findings for the housing market in the
UK, it encounters with some limitations. And all those restrictions are around the data
availability. As mentioning in the Literature review, regarding the supply-side and
demand-side determinants, land price and population density rate could be good
proxies. However, during the course of study, the data sets for both variables cannot
be found at the moment. In addition, the data sets for several explanatory variables
are not sufficient from the first quarter of 1985 to the last quarter of 2015, for
example: the cost of construction, the CPI, and the house rent index.

Having known the importance of data to the accuracy and efficiency of model, this
shortage might affect the eventual result. Therefore, further investigation conducted
in the future is necessary so that more accurate and comprehensive results could be
generated. The recommendations for the policy-makers, as a result are promisingly
much closer to the real-life circumstances.
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Appendices

Appendix I: Descriptive statistics

Appendix II: VAR Lag Order Selection Criteria

Appendix III: Johansen Cointegration tests result
Appendix IV: VECM result
Appendix V: Variance decomposition tests result
Appendix VI: Impulse response tests result