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THE DETERMINANTS OF HOUSE PRICES IN THE TWO-TIER HOUSING MARKET IN GUERNSEY

Executive Summary

With an area of just 24km2 and a population of over 65,000, there is an underlying shortage of property in Guernsey, and this, combined with the island's large financial sector, its low taxes and island life, has put additional pressure on the price of housing. Guernsey is a particularly interesting case because of its unique two-tier housing market system, which has a 'local market' for locals and an 'open market' for non-locals.

In the final analysis, the critical factor is how strong and well equipped the housing markets are to withstand shocks, i.e. their resilience. The most resilient markets are particularly those in which domestic demand is less dependent on external demand and therefore weaker "shock absorbers" allow external fluctuations to produce larger housing price volatility (Loayza and Raddatz, 2008). In both the local and open markets, favourable cyclical factors have played a role but a global slowdown could set back some of the recent progress and this might have been the case since December 2006 in the local housing market. However, both markets are likely to be open to external shocks from the UK and the rest of the world because of Guernsey's small size. In the open market, external risks are considerably attenuated by the greater income most people who participated in this market. Based on the data, it appears that the open market, while being more volatile, has better growth potential, less uncertainty, and may be more resistant to external shock, particularly because of the extreme supply constraints and the high demand.

This study was based on a data over a period of six and a half years and also important determinants were identified, future research may uncover other important determinants. This is particularly important in the open housing market, because even though GDP and interest rates were identified as major determinants, these only accounted for about half of the variance in house prices and so the identification of other key determinants is important. Similarly, in the local housing market, several variables performed in ways that were not hypothesised and so this is an area that warrants further examination.

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