FORECASTING UK HOUSE PRICES - A TIME-VARYING COEFFICIENT APPROACH

Previous studies of UK house prices, developed from the demand and sup ply of housing or from the asset market approach have been poor in ter ms of robustness and ex-post forecasting ability. The UK housing marke t has suffered a number of structural changes, particularly since the early 1980s with substantial house price increases, financial market d eregulation and the removal of mortgage market constraints through com petition. Consequently, models which assume that the underlying data-g enerating process is stable and apply constant parameter techniques te nd to suffer in terms of parameter instability. This article uses the Time Varying Coefficient (TVC) methodology where the underlying data-g enerating process in the UK housing market is treated as unstable. The estimation results of the TVC regression of UK house prices is compar ed with those obtained from three alternative constant parameter regre ssions. Comparisons of forecasting performance suggest the TVC regress ion out-performs forecasts from an Error Correction Mechanism (ECM), V ector Autoregressive (VAR) and an Autoregressive Time Series regressio n. (C) 1997 Elsevier Science B.V.