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A Model of Cross-Country House Prices (228.91 KB PDF)

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  • McQuinn, Kieran

    (Central Bank and Financial Services Authority of Ireland)

  • O' Reilly, Gerard

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The widespread nature of the recent international house price boom suggests that the underlying forces behind this sustained price increase may be common across countries. Many OECD countries have, over the past decade, witnessed sustained increases in living standards while housing affordability has further improved in recent years with the low interest rate environment experienced by many of these countries. In this paper we propose a theoretical model of house price determination that is driven by changes in income and interest rates. In particular, the current level of income and interest rates determine how much an individual can borrow from financial institutions to purchase housing and ultimately this is a key driver of house prices. The model is applied to a panel of 16 OECD countries from 1980 to 2005 using both single country-by-country and panel econometric approaches. Our results support the existence of a long-run relationship between actual house prices and the amount individuals can borrow and we find plausible and statistically significant adjustment, across countries, to this long run equilibrium.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 5/RT/07.

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Length: 34 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:cbi:wpaper:5/rt/07

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Cited by:
  1. Addison-Smyth, Diarmaid & McQuinn, Kieran & O' Reilly, Gerard, 2009. "Quantifying Revenue Windfalls from the Irish Housing Market," Research Technical Papers 10/RT/09, Central Bank of Ireland.
  2. 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.
  3. Kelly, Robert & McQuinn, Kieran & Stuart, Rebecca, 2011. "Exploring the Steady-State Relationship between Credit and GDP for a Small Open Economy - The Case of Ireland," Research Technical Papers 1/RT/11, Central Bank of Ireland.
  4. 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.
  5. Kennedy, Gerard & McQuinn, Kieran, 2011. "Scenarios for Irish House Prices," Economic Letters 02/EL/11, Central Bank of Ireland.
  6. Kennedy, Gerard & McQuinn, Kieran, 2012. "Why are Irish house prices still falling?," Economic Letters 05/EL/12, Central Bank of Ireland.
  7. Demary, Markus, 2009. "The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics," MPRA Paper 15978, University Library of Munich, Germany.
  8. Vansteenkiste, Isabel & Hiebert, Paul, 2011. "Do house price developments spillover across euro area countries? Evidence from a global VAR," Journal of Housing Economics, Elsevier, vol. 20(4), pages 299-314.
  9. Hiebert, Paul & Vansteenkiste, Isabel, 2009. "Do house price developments spill over across euro area countries? Evidence from a Global VAR," Working Paper Series 1026, European Central Bank.

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