The performance and inflation hedging ability of regional housing markets

The literature concerned with British regional housing markets has been relatively limited, especially in comparison to the research undertaken with regard to the commercial market. This paper aims to redress the balance primarily in two areas. First, the performance of regional housing markets over the period 1983 to 1995 is assessed and compared to comparable returns from the commercial sector and the UK equity and bond markets. The second area of concern is the inflation hedging ability of these markets. While a large number of studies have examined the UK commercial sector, the residential market has been largely ignored. The paper examines the issue using the Ordinary Least Squares (OLS) regression model proposed by Fama and Schwert (1977) and also on a long‐term basis using cointegration techniques. The results are mixed, with some evidence that the residential market provides a hedge, but with little evidence that the commercial market provides protection against inflation. While no evidence was found that either property sector is cointegrated with inflation, there was some evidence of causal relationships. Additionally, in both the performance appraisal and in the inflation tests, substantial differences were found between different regional markets.