THE IMPACT OF SPECULATION ON HOUSE PRICES IN THE UNITED-KINGDOM

When house prices are expected to rise, the representative house mover has an incentive to secure his purchase price (i.e. exchange contract s) on the 'new' house before exchanging contracts on the sale price on his 'old' house. If all house-movers adopt this stance, the imbalance between buyers and sellers causes a self-fulfilling speculative price bubble. Transactions costs do not represent a barrier to such specula tion in the house market, as such costs can be considered as being sun k costs for first-time buyers and owner-occupiers intending to move fo r non-speculative reasons. This idea is formalised and empirical evide nce is presented which suggests that speculation is a significant dete rminant of house prices in the United Kingdom. (C) 1997 Elsevier Scien ce B.V.