SWITCHING ERROR-CORRECTION MODELS OF HOUSE PRICES IN THE UNITED-KINGDOM

This paper develops error-correction models of real house prices in th e UK in which the adjustment coefficient switches stochastically betwe en a stable regime where disequilibrium correction takes place and an unstable regime where such a correction does not occur. The generating mechanism of the shifts is modelled as a Markov process with transiti on probabilities which are either time-invariant or depend on the exte nt to which the system is out of disequilibrium. Estimation of error-c orrection models for the UK reveals that the observed booms in real ho use prices are associated with an unstable regime. We also find that t he probability that the system remains in an unstable regime decreases as deviations from equilibrium increase. (C) 1997 Elsevier Science B. V.