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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.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 1/RT/98.

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Length: 65 pages
Date of creation: Mar 1998
Date of revision:
Handle: RePEc:cbi:wpaper:1/rt/98

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  1. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  2. Takatoshi Ito & Keiko Nosse Hirono, 1993. "Efficiency of the Tokyo Housing Market," NBER Working Papers 4382, National Bureau of Economic Research, Inc.
  3. Jo Corkish & David Miles, 1994. "Inflation, inflation risks and asset returns," Bank of England working papers, Bank of England 27, Bank of England.
  4. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, Elsevier, vol. 60(1-2), pages 203-233.
  5. repec:cbi:wpaper:4/rt/96 is not listed on IDEAS
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  19. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 26(1), pages 29-64, March.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Where is the housing market going in 2012?
    by brianmlucey in Brian M. Lucey on 2012-01-07 07:50:49
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Fitzpatrick, Trevor & McQuinn, Kieran, 2004. "House Prices and Mortgage Credit: Empirical Evidence for Ireland," Research Technical Papers 5/RT/04, Central Bank of Ireland.
  2. 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.
  3. O'Donnell, Nuala, 2007. "Housing Wealth and Consumption," Quarterly Bulletin Articles, Central Bank of Ireland, pages 119-136, January.
  4. Mc Quinn, Kieran, 2004. "A Model of the Irish Housing Sector," Research Technical Papers 1/RT/04, Central Bank of Ireland.
  5. Maurice J. Roche, 1999. "Irish House Prices - Will the Roof Cave In?," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 30(4), pages 343-362.
  6. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series, European Central Bank 0018, European Central Bank.
  7. Addison-Smyth, Diarmaid & McQuinn, Kieran & O' Reilly, Gerard, 2009. "Modelling Credit in the Irish Mortgage Market," Research Technical Papers 9/RT/09, Central Bank of Ireland.
  8. Roche, Maurice J., 2001. "The rise in house prices in Dublin: bubble, fad or just fundamentals," Economic Modelling, Elsevier, Elsevier, vol. 18(2), pages 281-295, April.
  9. Duffy, David, 2002. "A Descriptive Analysis of the Irish Housing Market," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), vol. 2002(2-Summer), pages 1-16.
  10. 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.
  11. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
  12. 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.
  13. Maurice J. Roche, 1999. "Irish house prices: will the roof fall in?," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n890699, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.

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