John Muellbauer

Nuffield College, Oxford University


Anthony Murphy

University College, Dublin


December 1996



The often volatile behaviour of UK house prices between 1957 and 1994 is analysed in an annual econometric model. Theory suggests that financial liberalization of mortgage markets in the 1980s should have led to notable shifts in house price behaviour. The evidence supports the predictions of theory, suggesting shifts took place in wealth effects, as in the consumption function, and that real interest rates and income expectations become more important. The presence of transactions costs suggests important non-linearities in house price dynamics. The paper also contains an explicit econometric treatment of expectations, demography, supply spillovers from the rented sector and of composition biases in the official house price index.

We are grateful for comments, on earlier version to the referees and to Janine Aron, Andy Chesher, Nick Coote, Mike Dicks, Steve Martin, Geoff Meen, Penelope Rowlatt, Neil Shephard and seminar participants at Bristol, Dublin, NERA and Oxford. David Hendry is due special thanks for unfailing help over the years this research has been in gestation. Responsibility for errors, however, likes with the authors. We are grateful to Rebecca Emerson, Sebastian Galiani and, especially Gavin Cameron for skilled research support. This research was financed in part by ESRC programme grants R000 23 1184 and R000 23 4954.