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Estimating the Trend of the House Price to Income Ratio in Ireland

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  • Yao, Fang

    (Central Bank of Ireland)

Abstract

Distinguishing trends and cycles in house prices is important for macroprudential policy. This paper estimates the unobserved trend and cycles of the house-price-to income ratio (HPI) using a multivariate unobserved components model, with auxiliary variables introduced for identifying both the trend and cycles. Under this approach, the HPI trend is driven by slow-moving fundamental forces, while the cyclical component of HPI is identified by using separate cyclical indicators in a VAR. I find that the estimated trend of the HPI ratio is rising over time, driven primarily by the declining natural interest rate, and to a lesser extent by credit conditions and housing imbalances. Of relevance for macroprudential policy setting, the underlying trend in HPI has risen by 8% since the introduction of borrower-based measures in 2015.

Suggested Citation

  • Yao, Fang, 2022. "Estimating the Trend of the House Price to Income Ratio in Ireland," Research Technical Papers 8/RT/22, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:8/rt/22
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    Cited by:

    1. Arigoni, Filippo & McCann, Fergal & Yao, Fang, 2022. "Mortgage credit and house prices: evidence to inform macroprudential policy," Financial Stability Notes 11/FS/22, Central Bank of Ireland.

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    More about this item

    Keywords

    real estate markets; macroprudential policy; systemic risk; financial crises; bubbles; financial regulation; financial stability indicators.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R39 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other

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