Housing Bubbles, Herds and Frenzies: Evidence from British Housing Markets

1 In a world of uncertainty, imperfect information and irreversible decision-making, speculation and information acquisition will generate bubbles, herding and frenzies in housing demand. The instability generated will be further exacerbated by liquidity constraints and institutional change. In this paper, the influence of herds, frenzies and bubbles on housing demand is assessed in the context of housing markets in England and Wales. Econometric models of housing transactions are estimated to capture herding effects, bubbles and crashes. In addition, techniques are used to capture regime switching, with regime switches being conditioned upon political and institutional changes in UK housing mortgage markets emerging in the 1980s. The evidence presented reveals that bubbles, herding and frenzies are important phenomena in housing markets and that the housing market is more effectively modelled when these destabilising effects are introduced into the analysis. The paper concludes with some policy implications.