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Understanding Irish house price movements - a user cost of capital approach

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Author Info

  • Browne, Frank

    (Central Bank of Ireland)

  • Conefrey, Thomas

    (Central Bank of Ireland)

  • Kennedy, Gerard

    (Central Bank of Ireland)

Abstract

This 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 Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 04/RT/13.

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Date of creation: Jun 2013
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Handle: RePEc:cbi:wpaper:04/rt/13

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Keywords: house prices; user cost; bubbles; rents; equilibrium;

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  1. Meen, Geoffrey P, 1990. "The Removal of Mortgage Market Constraints and the Implications for Econometric Modelling of UK House Prices," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(1), pages 1-23, February.
  2. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
  3. Duffy, David, 2011. "User Cost and Irish House Prices," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), issue 3-Autumn.
  4. 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.
  5. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
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Cited by:
  1. Ryan Fox & Peter Tulip, 2014. "Is Housing Overvalued?," RBA Research Discussion Papers rdp2014-06, Reserve Bank of Australia.

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