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A Behavioural Agent-Based Model for Housing Markets: Impact of Financial Shocks in the UK

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Abstract

The housing market in the UK features a mortgaging system where interest rates are either fixed for short periods (typically 2 or 5 years) or varied to track interest rates of the Bank of England base rate. The reactions of home buyers and investors to changes in the mortgage rate have impacts on the buy-to-let housing market, and this in turn impacts tenants who are renting from private landlords. Such reactions become more significant when there are financial shocks, as occurred in 2022, which create chain events that can affect house prices and rents. To explore the dynamics of the UK housing market, we introduce an Agent Based Model (ABM) featuring interactions between the mortgage, buy-to-let and rental housing markets. We use the model to understand the effects of interest rate and maximum loan-to-value shocks. The ABM demonstrates the complex associations between such shocks, house prices and rents. It shows that a sudden increase in mortgage interest rates decreases housing prices and steeply increases rent prices within 5 years. It also shows that a sudden decrease of the loan-to-value ratio significantly decreases housing prices.

Suggested Citation

  • Yahya Gamal & Corinna Elsenbroich & Nigel Gilbert & Alison Heppenstall & Kashif Zia, 2024. "A Behavioural Agent-Based Model for Housing Markets: Impact of Financial Shocks in the UK," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 27(4), pages 1-5.
    • Handle: RePEc:jas:jasssj:2024-10-3
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    References listed on IDEAS

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    1. Kohn, Robert E., 1990. "A capital budgeting model of the supply and demand for loanable funds," Journal of Macroeconomics, Elsevier, vol. 12(3), pages 427-436.
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