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Irish House Prices - Will the Roof Cave In?

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  • Maurice J. Roche

    (National University of Ireland, Maynooth)

Abstract

In the last few years there have been many comments made in the media about the Irish housing market boom. This paper focuses on two of these comments. The first comment is that some economists have suggested that a speculative bubble might be present in Irish house prices. The second comment is that some housing market analysts have asked whether a crash similar to what happened in the British housing market in the late 1980s would occur in Ireland. Many of these analysts suggest that it is highly unlikely that a similar slump would occur in the Irish housing market. Given that bubbles have a habit of bursting one might think that these remarks are contradictory. We reconcile these two comments using regime-switching models of real secondhand house prices in Britain and Ireland. The models are estimated and tested to explore whether speculative bubbles, fads or just fundamentals drive house prices. Our main findings suggest that there was a speculative bubble in Britain in the late 1980s and in Ireland in the late 1990s. We estimate that the probability of a crash in Britain reached its highest value of about 5 per cent in the last few quarters of 1989. We also estimate the probability of a crash in the Irish housing market to have increased to around 2 per cent by the end of 1998.

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File URL: http://www.esr.ie/vol30_4/1_Roche.pdf
File Function: First version, 1999
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Bibliographic Info

Article provided by Economic and Social Studies in its journal Economic and Social Review.

Volume (Year): 30 (1999)
Issue (Month): 4 ()
Pages: 343-362

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Handle: RePEc:eso:journl:v:30:y:1999:i:4:p:343-362

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References

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  1. Irvine, Ian J., 1984. "A Study of New House Prices in Ireland in the Seventies," Research Series, Economic and Social Research Institute (ESRI), number GRS118.
  2. Hort, Katinka, 1997. "The Determinants of Urban House Price Fluctuations in Sweden 1967-94," Working Paper Series 1997:4, Uppsala University, Department of Economics.
  3. Vigfusson, R. & Van Norden, S., 1996. "Avoiding the Pitfalls: Can Regime-Switching Tests Detect Bubbles?," Working Papers 96-11, Bank of Canada.
  4. Takatoshi Ito & Tokuo Iwaisako, 1995. "Explaining Asset Bubbles in Japan," NBER Working Papers 5358, National Bureau of Economic Research, Inc.
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  8. Levin, Eric J. & Wright, Robert E., 1997. "The impact of speculation on house prices in the United Kingdom," Economic Modelling, Elsevier, vol. 14(4), pages 567-585, October.
  9. Richard Meese & Nancy Wallace, 1990. "Determinants of residential housing prices in the Bay Area 1970-1988: effects of fundamental economic factors or speculative bubbles?," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  10. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc.
  11. Van Norden, S. & Vigfusson, R., 1996. "Regime-Switching Models, A guide to the Bank of Canada Gauss Procedures," Working Papers 96-3, Bank of Canada.
  12. Kenny, Geoff, 1998. "The Housing Market and the Macroeconomy: Evidence From Ireland," Research Technical Papers 1/RT/98, Central Bank of Ireland.
  13. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
  14. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-64, March.
  15. Huntley Schaller & Simon van Norden, 1997. "Fads or Bubbles?," Working Papers 97-2, Bank of Canada.
  16. Hall, Stephen & Psaradakis, Zacharias & Sola, Martin, 1997. "Switching error-correction models of house prices in the United Kingdom," Economic Modelling, Elsevier, vol. 14(4), pages 517-527, October.
  17. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  18. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
  19. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
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Cited by:
  1. 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.
  2. Duffy, David, 2011. "User Cost and Irish House Prices," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), issue 3-Autumn.
  3. 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.
  4. Keane, Claire & Walsh, John R. & Callan, Tim & Savage, Michael, 2012. "Property Tax in Ireland: Key Choices," Papers EC11, Economic and Social Research Institute (ESRI).
  5. 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.
  6. Dascher, K., 2000. "Trade, FDI and Congestion: the Small and Very Open Economy," Papers 00/09, College Dublin, Department of Political Economy-.
  7. Roche, Maurice, 2003. "Will there be a Crash in Irish House Prices?," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2003(4-Winter), pages 1-16.
  8. Honohan, Patrick, 2009. "Resolving Ireland’s Banking Crisis," The Economic and Social Review, Economic and Social Studies, vol. 40(2), pages 207–231.
  9. Mc Quinn, Kieran, 2004. "A Model of the Irish Housing Sector," Research Technical Papers 1/RT/04, Central Bank of Ireland.
  10. Kennedy, Gerard & McQuinn, Kieran, 2011. "Scenarios for Irish House Prices," Economic Letters 02/EL/11, Central Bank of Ireland.
  11. 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.
  12. Morgenroth, Edgar, 2014. "Projected Population Change and Housing Demand: A County Level Analysis," Research Notes RN2014/2/3, Economic and Social Research Institute (ESRI).
  13. David Duffy & John FitzGerald & Ide Kearney, 2005. "Rising House Prices in an Open Labour Market," Papers WP166, Economic and Social Research Institute (ESRI).
  14. 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.
  15. Morgenroth, Edgar, 2014. "Modelling the Impact of Fundamentals on County Housing Markets in Ireland," MPRA Paper 57665, University Library of Munich, Germany.

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