Overheated behaviours and spread effects: an analysis of London’s housing market

ABSTRACT This paper takes the London housing market as an example to discuss whether housing markets with more significant overheating effects have a greater influence on other housing markets. The spillover effect of London’s housing market has been the subject of much literature, but the empirical results of the relevant literature are inconsistent. This paper proposed a new perspective to explain these inconsistent conclusions: Whether the housing market is overheated or not can affect the spread effect of a regional housing market. The paper estimated the indicators of real estate overheated behaviours and market connectedness. Further, it revealed that when real estate overheated behaviours became more severe, the irrationally high house prices resulted in spread effects. The empirical results also showed that when the overheating effect occurred in London’s housing market, the rental yield of its adjacent regions significantly increased; specifically, the rental yield of a region increased with its closeness to London. The results of this study provide an explanation for the variation in spread effects. This study also indicated that when studying the influence of the relatively booming housing markets on other regions, it is necessary to test the prosperity status of these housing markets to more accurately estimate the spread effects of these markets.