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Contagion, Interdependence and Diversification across Regional UK Housing Markets

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  • Wichita State University

    (Wichita State University)

Abstract

UK home prices often exhibit only moderate (and sometimes barely positive) correlation across different regions. This reflects segmentation in the national housing market and also provides an apparent opportunity for lenders and investors to diversify their exposure to regional downturns, for instance, by creating residential mortgage backed securities out of geographically dispersed home loans. Unfortunately, in a crisis, correlations may rise, and the benefits from geographical diversification may disappear just when investors desire them the most. By using a flexible generalized autoregressive conditional heteroskedasticity technique, we find that regional correlations indeed rose dramatically during the latest downturn, in some cases, to unprecedented levels. Moreover, this increase in co-movement was clearly financial contagion, and not merely interdependence. Lenders, as well as investors in mortgage-backed and other housing securities should thus not rely on house price correlations calculated during ¡§normal¡¨ times.

Suggested Citation

  • Wichita State University, 2016. "Contagion, Interdependence and Diversification across Regional UK Housing Markets," International Real Estate Review, Global Social Science Institute, vol. 19(3), pages 327-351.
    • Handle: RePEc:ire:issued:v:19:n:03:2016:p:327-351
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    More about this item

    Keywords

    Contagion; Interdependence; Housing; UK;
    All these keywords.

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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