Gwilym Pryce

Submarket Dynamics of Time to Sale

We argue that the rush to apply multiple regression estimation to time on the market (TOM) durations may have led to important details and idiosyncrasies in local housing market dynamics being overlooked. What is needed is a more careful examination of the fundamental properties of time to sale data. The approach promoted and presented here, therefore, is to provide an examination of housing sale dynamics using a step-by-step approach. We present three hypotheses about TOM: (i) there is nonmonotonic duration dependence in the hazard of sale, (ii) the hazard curve will vary both over time and across intra-urban areas providing evidence of the existence of submarkets and (iii) institutional idiosyncrasies can have a profound effect on the shape and position of the hazard curve. We apply life tables, kernel-smoothed hazard functions and likelihood ratio tests for homogeneity to a large Scottish data set to investigate these hypotheses. Our findings have important implications for TOM analysis.

The Impact of Floods on House Prices: An Imperfect Information Approach with Myopia and Amnesia

How will housing markets respond to increased frequency and severity of flooding expected with global climate change? Existing models yield poor predictions because they assume perfect information and rational decision-making processes in the housing market. This paper sets out a plausible alternative framework for analysing housing price responses to flood frequency and severity based on findings of behavioural economics and the sociology of risk, which emphasise myopic and amnesiac perceptions of risk. It utilises this framework to analyse graphically a variety of flood scenarios and their implications for housing prices and government intervention.

Unemployment insurance for mortgage borrowers: is it viable and does it cover those most in need?

One of the principal downside risks of financial deregulation is the possible deleterious effect it may have on the incidence of mortgage arrears and possessions. Successive UK governments have enthusiastically pursued both financial deregulation and the promotion of private mortgage payment protection insurance (MPPI) as the primary safety net for mortgage borrowers. As such, the UK is an important test case for other European countries considering either or both avenues of policy. With this motivation, we review the mortgage payment protection insurance (MPPI) debate in the UK and examine whether mortgage borrowers who choose to remain uninsured do so because they are in the most stable forms of employment and/or have sufficient financial resources to cover periods of unemployment, or because their employment risks are not covered by MPPI and/or they cannot afford the premium. These are important questions because if affordability proves to be a key driver of take-up, then private mortgage insurance is fundamentally flawed as an antidote to the risks that follow from financial deregulation. Family Resources Survey data are used to examine the characteristics of the uninsured which are then compared to data on employment stability in an attempt to identify those groups of mortgage borrowers most at risk. Income and savings of the uninsured are also examined to establish whether borrowers consider personal financial resources to be substitute for insurance. We find that neither those in the riskiest categories of employment, nor those with the least financial resources, have the highest rates of MPPI take-up. We also find a surprisingly large variation in the take-up across household types. In particular, we find that households with a greater number of children relative to adults have significantly lower MPPI take-up rates. These findings provide evidence that affordability is an important driver of MPPI take-up, for whilst there is no obvious reason why having more children reduces the default risk of a household, it is clear that the number of children will have a direct effect on the ratio of outgoings to earnings and hence on a households ability to afford MPPI. Inability of certain borrowers to afford MPPI may explain why the highest risk groups do not have the highest levels of take-up. The corollary of our results is that MPPI is not viable as a widespread safety net for mortgage borrowers, and so the assumption that private mortgage insurance can be a substitute for stateprovided protection is fundamentally flawed.

Rhetoric in the Language of Real Estate Marketing

‘Des. Res.’, ‘rarely available’, ‘viewing essential’—these are all part of the peculiar parlance of housing advertisements which contain a heady mix of euphemism, hyperbole and superlative. Of interest is whether the selling agents penchant for rhetoric is spatially uniform or whether there are variations across the urban system. This paper is also interested in how the use of superlatives varies over the market cycle and over the selling season. For example, are estate agents more inclined to use hyperbole when the market is buoyant or when it is flat, and does it matter whether a house is marketed in the summer or winter? This paper attempts to answer these questions by applying textual analysis to a unique dataset of 49 926 records of real estate transactions in the Strathclyde conurbation over the period 1999 to 2006. The analysis opens up a new avenue of research into the use of real estate rhetoric and its interaction with agency behaviour and market dynamics.

A Statistical Explanation for Extreme Bids in the House Market

This paper proposes a simple statistical explanation for the phenomenon of extreme bids. During a boom, the housing market regime switches from a single bidder to a multiple bidder environment. The sale price in a multiple bidder auction is the maximum bid and the distribution of maximum bids contains a much higher proportion of extreme bids compared with the distribution of single bidder valuations. While this theory does not preclude behavioural explanations of extreme bids, it does demonstrate that a world free from strategic and idiosyncratic behaviour would not be a world free from extreme bids during boom periods. Therefore, when gauging the impact of strategic or idiosyncratic behaviour (either hypothetically or empirically) one has to measure the effect against a baseline regime where extreme bids are inevitable, not against a world that is free from extreme bids.

Theory and Estimation of the Mortgage Payment Protection Insurance Decision

This paper examines the decision to take out mortgage payment protection insurance (MPPI) in the UK. The paper explains how MPPI has increased in importance over the last decade due to the government stating that Income Support for Mortgage Interest (ISMI) has crowded-out MPPI. A theoretical model of the mortgage protection insurance decision is developed which takes account of the welfare system. The model is estimated using logit analysis on 1995 Glasgow and Bristol data. Elasticities of the probability of take-up with respect to a variety of arguments are calculated, including the level of ISMI. The estimated elasticity with respect to ISMI is found to be very low, which suggests that the crowding-out motivation for the restructuring of Income Support for Mortgage Interest in October 1995 had little support in the data available at the time of the policy decision, and explains the continued low take-up rates since the 1995 restructuring. Copyright 2002 by Scottish Economic Society.

What determines the price elasticity of house supply? Real interest rate effects and cyclical asymmetries

This paper offers a theoretical discussion of the price elasticity of supply. While there have been a number of attempts to estimate the responsiveness of UK supply, relatively little has been written on what determines it. A key omission is the effect of long-term real interest rates. Steep falls in both the annual rent to house price ratio and long real interest rates during a period of relatively static real rents in the UK suggest that the stream of future imputed rents became discounted at successively lower interest rates between 1996 and 2007. New supply responded sluggishly to price rises during this period, but then collapsed rapidly as the market turned in 2008. This paper argues that the decline in long-term real interest rates contributed to rising house prices and the inelastic supply response during the long upswing, and that cyclical asymmetries inherent in the supply response have been exacerbated by changes in the financial system and increased government regulation of the planning process.

Housing Prices and Multiple Employment Nodes: Is the Relationship Nonmonotonic?

Standard urban economic theory predicts that house prices will decline with distance from the central business district. Empirical results have been equivocal, however. Disjoints between theory and empirics may be due to a nonmonotonic relationship between house prices and access to employment arising from the negative externalities associated with proximity to multiple centres of employment. Based on data from Glasgow (Scotland), we use gravity-based measures of accessibility estimated using a flexible functional form that allows for nonmonotonicity. The results are thoroughly tested using recent advances in spatial econometrics. We find compelling evidence of a nonmonotonic effect in the accessibility measure and discuss the implications for planning and housing policy.

Bidding Conventions and the Degree of Overpricing in the Market for Houses

How do buyers decide whether a property is overpriced? Do they base their judgement on the simple difference between the asking price and expected selling price? Or do they take into account local bidding conventions—the typical asking–selling price spread in the neighbourhood? This paper explores the implications of bidding conventions for the definition and measurement of the degree of overpricing and the effect this has on a survival model of time on the market. The paper also considers the impact of uncertainty and employs fractional polynomial regression to explore whether spatio-temporal variations in attribute prices affect market perceptions of overpricing.

Housing submarkets and the lattice of substitution

This paper aims to stimulate interest in the early micro-economic conceptualisation of housing submarkets proposed by Rapkin and Grigsby, which defined market areas in terms of dwelling substitutability. Three key questions need to be addressed if a return to the Rapkin–Grigsby approach is to be achievable and worthwhile. First, what are the practical benefits? (The paper highlights a range of potential research applications that would benefit from the substitutability approach.) Secondly, in what way are existing approaches likely to be inadequate for demarcating substitutability-based submarkets? (Four criteria are proposed for assessing submarket estimation methods which existing approaches fail to satisfy.) Thirdly, what are the prospects for developing a substitutability metric that will make the Rapkin–Grigsby definition empirically feasible? (A new measure is proposed, based on the cross-price elasticity of price (CPEP), which is illustrated using data for Glasgow, Scotland.)