Unpacking Housing Market Connectedness

Motivated by the contradictory evidence documented in the literature, this paper proposes a different approach to investigating regional connectedness in the UK housing market. Drawing upon the notion that returns can be decomposed into components to reward homeowners for assuming common (market wide) risk, and a residual, which is compensation for idiosyncratic risk, we argue that the latter is particularly relevant when trying to understand regional connectedness. Using the dynamic network methodology with the raw return data, we firstly show that the South East has the greatest influence on regional market integrations, consistent with prior empirical research. Next, we filter the series for a common risk factor, resulting in regional return series which are unrelated to the national market. Doing so reveals London to be the most influential region in the country, consistent with intuition and prior theory. The work can provide important implications for empirical modelling, investment strategies and government policy.