Understanding Irish house price movements - a user cost of capital approach
AbstractThis paper employs the user cost of capital to examine Irish house price movements. The bundle of services afforded by a dwelling can be accessed either by renting the dwelling or by outright purchase. Between 2002 and 2007, a combination of factors including rapid house price appreciation and the prevailing fiscal and monetary environment created a strong bias towards homeownership. This was reflected in a negative user cost of housing as capital gains exceeded funding costs (both direct mortgage cost and the opportunity cost) thereby incentivising home ownership and fuelling further increases in prices. We find that the collapse in house prices since 2007 has contributed to a reversal of this process. From mid-2007 onwards, the user cost has soared as capital losses have greatly exceeded the funding costs (albeit falling) causing house prices to fall further. Both fiscal and financial policy measures which could enable a more efficient functioning of the housing market are discussed.
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Bibliographic InfoPaper provided by Central Bank of Ireland in its series Research Technical Papers with number 04/RT/13.
Date of creation: Jun 2013
Date of revision:
house prices; user cost; bubbles; rents; equilibrium;
Find related papers by JEL classification:
- R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-05 (All new papers)
- NEP-EUR-2013-07-05 (Microeconomic European Issues)
- NEP-URE-2013-07-05 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Antonia Diaz & Maria J. Luengo-Prado, 2006.
"On The User Cost And Homeownership,"
Economics Working Papers
we065421, Universidad Carlos III, Departamento de Economía.
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- Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
- Duffy, David, 2011. "User Cost and Irish House Prices," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), issue 3-Autumn.
- Diaz-Serrano, Luis, 2005. "Income volatility and residential mortgage delinquency across the EU," Journal of Housing Economics, Elsevier, vol. 14(3), pages 153-177, September.
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