Predicting Economic Market Failure and Collapse in The London Housing Market and How It Compares to a Collapse in The Wider UK Housing Market – A VAR Approach (2020)

The general objective of this dissertation is to (i) test whether a collapse in the London Housing Market would affect the UK economy and (ii) see if its impact on the economy is more significant than the impact of a UK Housing Market shock. We use a Vector Autoregressive model (VAR) to analyse how GDP, Inflation and Uncertainty might react to a shock in either the London or the UK Housing Market. To do that, we go through the Impulse Response Function (IRF) which helps us identify the sign, significance and duration of the responses of our variables to a simulated shock in one the Housing Market.

We then go through the Historical Decomposition which calculates the contribution of the housing markets to the different structural accumulated shocks of our variables; and, helps us estimate whether the results found through the IRFs make empirical sense. We expect GDP to fall, Inflation to slow down, and Uncertainty to be negatively affected. We also consider the possibility of a recession being created in the economy, if GDP growth is affected negatively for more than three quarters. Lastly, we suppose that the London Housing Market will have a more significant impact on the economy.

We use an econometrics model called Vector Auto-regressive to try and estimate the impact of a sudden shock in House Prices on the economy. We first go through the Impulse Response Function, which helps us analyse the expected dynamic consequences of shocks in the London and UK Housing Markets. The second feature of the VAR model which is used, is the Historical Decomposition which shows how in the past, the Housing Markets analysed, have contributed to the structural accumulated shocks in our variables of interest. We also have a look at how financial liberalisation might have affected the economy and lead the Housing Market in the UK to have too prominent a place in the economy, by examining the expected dynamic consequences of such shocks before and after 1992, the starting point of the different monetary approach.

  • 12,000 words – 46 pages in length
  • Good use of literature
  • Excellent analysis of subject area
  • Well written throughout
  • Ideal for economics students

1 – Introduction

2 – Literature Review

3 – Analysis
Methodology and Data
Empirical Model and the Data
Identification Strategy
Impulse Response
The London Case
The UK Case
Historical Decomposition
Comparing the London case with the UK case
Sensitivity Analysis
Robustness Analysis
Changing the order
Replacing Uncertainty with other variables
Dividing the sample
Results prior to 1992
Results following 1992
Comparing our two sub-samples results
Critics and limitations of our model

4 – Conclusion



Predicting Economic Market Failure and Collapse in The London Housing Market
Predicting Economic Market Failure and Collapse in The London Housing Market

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