House Prices and Economic Risks - Are Irish Households Rational?
AbstractThis study analyzes the evolution of house prices in Ireland and investigates the question of whether Irish households are overexposed to certain economic risks rendering the decision to buy a house too risky and hence irrational. We use a simple theoretical framework to demonstrate the investment options of a typical household and derive the risk factors associated with the purchase of a house with respect to other types of investment. Irish households hold the majority of their investments in property, specifically in their own houses. The empirical results illustrate that this wealth is exposed to inflation, interest rate changes and the business cycle. This exposure, while not problematic in times of low interest rates, moderate inflation and economic expansion, amplifies the risk to the value of households’ investments if inflation increases, interest rates rise or the economy is in recession. We argue that the adoption of the euro has increased this risk because interest rates are exogenous to the Irish economy which could lead to a situation of deteriorating economic conditions and rising interest rates. Our findings indicate that Irish households potentially underestimate the risk of buying a house. Viewing the purchase of a house as a risky investment could help reduce private debt in the future.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp252.
Date of creation: 06 Jun 2008
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-05 (All new papers)
- NEP-EEC-2008-07-05 (European Economics)
- NEP-MAC-2008-07-05 (Macroeconomics)
- NEP-URE-2008-07-05 (Urban & Real Estate Economics)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Colette Keleher).
If references are entirely missing, you can add them using this form.