International Journal of Business and Economics Volume 10, No. 3 December, 2011

The Importance of Real and Nominal Shocks on the UK Housing Market

Seema Narayan

Senior Lecturer in Economics, RMIT University, Australia

Paresh Kumar Narayan

Faculty of Business and Law, Deakin University, Australia

Abstract

The goal of this paper is to examine the responsiveness of the UK housing market to real and nominal shocks. To achieve this goal, we use a structural VAR model based on quarterly data for the period 1957:1–2009:4. We find that, in response to an interest rate shock, aggregate and modern house prices fall sharply over the first 4 years and do not recover to their pre-shock level. In response to a real GDP shock, both house prices react in a positive inverted U-shaped manner. Finally, we find that an inflation shock has a U-shaped negative impact on aggregate and modern house prices in the UK.

Keywords：housing market, UK, interest rate, real GDP, inflation.

JEL Classifications：C22.

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