Purpose: The study aims to examine the relationship between key economic fundamentals and average house price movements before and during the financial crisis of 2007 to 2009 in the UK and the USA.
Design/methodology/approach: Multiple regression analysis is applied in assessing the correlation between average house prices and a set of selected economic fundamentals.
Findings: The study results show that earnings and to less extent interest rate have the highest correlation with the average house price (AHP) and among the different types of interest rate used variable interest rate has the strongest correlation with AHP. The results also reveal that most indicators behave in the same way both before and during the financial crisis, but with better explanatory power for the pre-crisis period. Another key finding is that the directions of relationship for some of the parameters have changed when the market is in crisis, especially in the case of loans extended to house purchase for the UK market and number of households for the USA market.
Practical implications: The study findings provide insights to financial policy makers and bank managers on how different types of mortgage rates and other key economic fundamentals affect house price movements during the financial crisis and ultimately use this as a basis for their decision making in adjusting or altering these parameters to improve housing market stability.
Originality/value: The originality of the paper stems in using a wide range and thoroughly selected economic fundamentals to explain the movement in house prices and to observe the effect of financial crisis on the correlation between each economic factor and house price movements. The study is also unique in comparing the UK and the USA housing markets for the time frame under consideration as well as for the economic parameters used.