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they employ GMM and VAR models to measure the overvaluation of the market in relation to rents. Their main findings were that the price-to-rent ration in 2003 was above equilibrium in all three countries. In addition, their results showed that UK was about 30% in disequilibrium, Spain around 20%, and 10% for the US. They stated that most of the disequilibria in Spain and UK can be explained by the slow adjustment of rents and also to the lack of quality house supply.

The UK house market
Hasan and Taghavi (2002) aim was to examine the relationship between macroeconomic variables and residential investment over the period 1968-1999. In their paper they use a co-integrated vector autoregressive model for six variables- output, mortgage rate, residential investment, money supply, government spending and price. According to their results in the long-run fiscal policy has a modest effect on residential investment, whereas monetary policy appears to have larger and noticeable impact. The papers findings confirm that the house price inflation has seriously increased after the monetary deregulations in the 1980s.

An important point in our discussion on house markets is the wealth effect from increased prices of property. People tend to increase their consumption when the price of their house increases. In the mid nineties the residential property in the UK was around 35 per cent of the average household wealth (The National Bureau of Economic Research, 2009). As we can see the residential property of household plays a big role in the behaviour of people and their consumption. Moreover, the housing wealth effect may be especially important in recent decades, as institutional innovations (such as second mortgages in the form of secured lines of credit) have made it as simple to extract cash from housing equity. Furthermore, from the homeowner point of view it makes sense to use a mortgage to fund spending because mortgage interest rates are typically considerably less than those on credit cards and unsecured consumer debt. In fact, economic papers like Case and Shiller (2001) have observed that wealth effect associated with real estate are more significant that those linked to financial asset holdings in most economies. In their work they use both time-series and cross-sectional data to estimate the effect of house price movements and stock market movements on the consumption. According to their results a 10 per cent change in house wealth is related with roughly 1.1 per cent increase in consumption. The results are from international panel data, which includes developed countries for the period between 1980 and 1999. In addition, the same 10 per cent increase in stock market wealth has virtually no effect upon consumption. All of their empirical results support the conclusion that changes in house prices have a larger and more important impact than changes in stock prices on household consumption in US and other well-developed countries.

. Gallin (2004) showed that when house prices are high relative to rents changes in prices will be smaller than usual and changes in rents will be larger than usual. He used long-horizontal regression approach to prove that the rent-price ratio helps prediction of future changes in the housing market. The results lend empirical support to the view that the rent-price ratio is an indicator of valuation in the housing market. Moreover, Leamer (2002) suggests that