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Assessing the Role of Income and Interest Rates in Determining House Prices

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Author Info
McQuinn, Kieran (Central Bank and Financial Services Authority of Ireland)
O'Reilly, Gerard (Central Bank and Financial Services Authority of Ireland)

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Abstract

Property prices across many OECD countries have witnessed remarkable increases over the past 10 years. Two factors frequently posited for this boom are higher income levels and the benign interest rate environment experienced in many of these countries. However, empirical models of house prices struggle to achieve credible results concerning the impact of interest rates with coefficients that are frequently insignificant or of the wrong sign. In this paper we propose an intuitive theoretical model of house prices where the demand for housing is driven by how much individuals can borrow from financial institutions. This level of borrowing depends on disposable income levels and current interest rates. We empirically test this model by applying it to the Irish property market. Our results support the existence of a long-run relationship between actual house prices and the amount individuals can borrow with plausible and statistically significant adjustment to this long run equilibrium.

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Publisher Info
Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 15/RT/06.

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Length: 30 pages
Date of creation: Dec 2006
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Handle: RePEc:cbi:wpaper:15/rt/06

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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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.:

  1. David Duffy & John Fitz Gerald & Ide Kearney, 2005. "Rising House Prices in an Open Labour Market," The Economic and Social Review, Economic and Social Studies, vol. 36(3), pages 251-272. [Downloadable!]
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  2. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May. [Downloadable!] (restricted)
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  3. Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Blackwell Publishing, vol. 17(31), pages 334-55, December.
  4. Denis Conniffe & David Duffy, 1999. "Irish House Price Indices ? Methodological Issues," Papers WP110, Economic and Social Research Institute (ESRI). [Downloadable!]
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  5. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  6. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2003-2), pages 299-362. [Downloadable!]
  7. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-76, July. [Downloadable!] (restricted)
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  8. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," CEPR Discussion Papers 1615, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  10. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  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, 01. [Downloadable!] (restricted)
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  12. Sean D. Campbell & Morris A. Davis & Joshua Gallin & Robert F. Martin, 2006. "A trend and variance decomposition of the rent-price ratio in housing markets," Finance and Economics Discussion Series 2006-29, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(3), pages 195-228. [Downloadable!] (restricted)
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  14. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November. [Downloadable!] (restricted)
  15. Maurice J. Roche, 1999. "Irish house prices: will the roof fall in?," Economics, Finance and Accounting Department Working Paper Series n890699, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
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  1. 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 & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
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