House prices, arrears and possessions: A three equation model for the UK

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 June 1993

Working Paper No. 14

By F J Breedon and M A S Joyce

The current slump in the UK housing market has coincided with record increases in mortgage arrears and possessions. Falling nominal house prices reduce the amount of unwithdrawn equity in housing and, under certain conditions, provide incentives for borrowers to accumulate arrears and for lenders to possess. However, possessions may themselves depress house prices. This paper attempts to analyse and quantify these interactions by estimating a three equation econometric model of UK mortgage arrears, possessions and house prices, in which expectations of future house prices are formed according to the rational expectations hypothesis. The model is simulated to examine the implications of interest rate changes and policies to reduce possessions.

Update: May 1993
This paper provides a more detailed, technical account of the analysis summarised in an article in the May 1992 Bank of England Quarterly Bulletin. It does not take account of developments in the housing market since then. In the 1992 Autumn Statement, the Government announced a scheme to enable housing associations to buy 20,000 empty properties for social housing. Although this scheme is not discussed in the paper, it is similar to the policy change analysed in Simulation 1. 

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