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The Housing Market and the Macroeconomy: Evidence From Ireland

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  • Kenny, Geoff

    (Central Bank and Financial Services Authority of Ireland)

Abstract

This paper provides an empirical assessment of the important linkages which may exist between the housing sector and several key macroeconomic variables. The analysis focuses on (i) the effects of rising real incomes on house prices, (ii) the impact of monetary policy, i.e. interest rates, on developments in the housing market, (iii) the nature and speed of price adjustment in the housing market, (iv) the nature and speed of supply adjustment in the housing market and (v) potential impacts of rising real house prices on real consumption. The key empirical result in the paper is the identification of two long-run relationships which capture the fundamental economic behaviour on both the demand and supply sides of the housing market. In the long-run, the demand side of the market can be modelled using a stable relationship between house prices, the housing stock, income and mortgage interest rates. It was discovered that an increase in income results in a proportional rise in the long-run demand for housing. In addition, the demand for housing responds negatively and proportionately to increases in the price of housing. Mortgage interest rates were also shown to exert a significant negative effect on the demand for housing. To model the supply side of the market, the empirical section of the paper tested the data for the existence of a stable ratio of house prices to construction costs which is consistent with "normal profits" in the house building sector. The housing stock is shown to adjust positively in order to ensure the stability of this profit ratio. Based on this characterisation of housing demand and supply, it would seem possible to explain much of the recent rise in house prices as an efficient relative price change in the presence of very sluggish supply adjustment. In addition, the model suggests that, given the short-run fixity of supply, it is reasonable to expect that house prices will overshoot their equilibrium level and then subsequently decline somewhat.

Suggested Citation

  • Kenny, Geoff, 1998. "The Housing Market and the Macroeconomy: Evidence From Ireland," Research Technical Papers 1/RT/98, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:1/rt/98
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    1. Where is the housing market going in 2012?
      by brianmlucey in Brian M. Lucey on 2012-01-07 13:50:49

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    2. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series 0018, European Central Bank.
    3. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
    4. Roche, Maurice J., 2001. "The rise in house prices in Dublin: bubble, fad or just fundamentals," Economic Modelling, Elsevier, vol. 18(2), pages 281-295, April.
    5. Addison-Smyth, Diarmaid & McQuinn, Kieran & O'Reilly, Gerard, 2009. "Modelling Credit in the Irish Mortgage Market," The Economic and Social Review, Economic and Social Studies, vol. 40(4), pages 371-392.
    6. Vincent (Vincent Peter) Hogan & Patrick O'Sullivan, 2003. "Consumption and house prices in Ireland," Open Access publications 10197/330, School of Economics, University College Dublin.
    7. Mc Quinn, Kieran, 2004. "A Model of the Irish Housing Sector," Research Technical Papers 1/RT/04, Central Bank of Ireland.
    8. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series 18, European Central Bank.
    9. D'Agostino, Antonello & McQuinn, Kieran & O' Reilly, Gerard, 2008. "Identifying and Forecasting House Price Dynamics in Ireland," Research Technical Papers 3/RT/08, Central Bank of Ireland.
    10. Duffy, David & McQuinn, Kieran & Morley, Ciara & Foley, Daniel, 2015. "Quarterly Economic Commentary, Winter 2015," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC20154.
    11. Trevor Fitzpatrick & Kieran Mcquinn, 2007. "House Prices And Mortgage Credit: Empirical Evidence For Ireland," Manchester School, University of Manchester, vol. 75(1), pages 82-103, January.
    12. Morley, Ciara & Duffy, David & McQuinn, Kieran, 2015. "A Review of Housing Supply Policies," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    13. O'Donnell, Nuala, 2007. "Housing Wealth and Consumption," Quarterly Bulletin Articles, Central Bank of Ireland, pages 119-136, January.
    14. Addison-Smyth, Diarmaid & McQuinn, Kieran & O' Reilly, Gerard, 2008. "Estimating the Structural Demand for Irish Housing," Research Technical Papers 1/RT/08, Central Bank of Ireland.
    15. Maurice J. Roche, 1999. "Irish house prices: will the roof fall in?," Economics Department Working Paper Series n890699, Department of Economics, National University of Ireland - Maynooth.
    16. Maurice J. Roche, 1999. "Irish House Prices - Will the Roof Cave In?," The Economic and Social Review, Economic and Social Studies, vol. 30(4), pages 343-362.
    17. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    18. Duffy, David, 2002. "A Descriptive Analysis of the Irish Housing Market," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2002(2-Summer), pages 1-16.
    19. McQuinn, Kieran & O'Reilly, Gerard, 2006. "Assessing the Role of Income and Interest Rates in Determining House Prices," Research Technical Papers 15/RT/06, Central Bank of Ireland.
    20. Clancy, Daragh & Cussen, Mary & Lydon, Reamonn, 2014. "Housing Market Activity and Consumption: Macro and Micro Evidence," Research Technical Papers 13/RT/14, Central Bank of Ireland.

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