UK house price-at-risk model forecasts downside risks
A new Bank of England working paper develops a house price-at-risk framework for the UK, forecasting downside risks to house price growth up to two years ahead. The model identifies transaction growth, mortgage rates, and financial stress as key tail risk predictors.
Tail risks from transactions, rates, and stress
A new Bank of England working paper introduces a house price-at-risk (HPaR) framework for the UK, covering both national and sub-national levels across nine English regions, Wales, Scotland, and Northern Ireland.
The model tracks and decomposes the distribution of house price growth, with a particular focus on tail risks.
Since the 1970s, the most significant predictors for the tail of the distribution have been identified as transaction growth, changes in mortgage rates, the credit to GDP gap, and financial stress.
The framework demonstrates its applicability in forecasting downside risks to house price growth and the probability of negative growth up to two years ahead, offering a comprehensive tool for financial stability monitoring.
Regional variations and supply dynamics
The analysis reveals considerable regional variation, particularly in the estimated coefficients for mortgage interest rates.
Supply-inelastic regions exhibit higher values, suggesting more pronounced price drops following increases in mortgage rates due to limited short-term supply adjustment and discouraged demand.
Conversely, an increase in housing supply in most regions is associated with a subsequent easing of price pressures in regional markets.
This study is the first empirical analysis of UK house price growth using a quantile regression approach, highlighting the added value of regional-level analysis for assessing local market conditions and identifying supply constraints.
Robust framework, critical insights
This paper offers a robust, data-driven framework for assessing UK house price risks, filling a significant gap in the literature.
Its comprehensive approach, particularly the regional analysis, provides critical insights for macroprudential policymakers.
The findings on tail risk predictors and supply dynamics are directly actionable for financial stability monitoring.