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House Price Expectations, Labour Market Developments and the House Price to Rent Ratio: A User Cost of Capital Approach

Author

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  • Kieran McQuinn

    (Economic and Social Research Institute (ESRI)
    Trinity College Dublin)

  • Teresa Monteiro

    (Institut fur Arbeitsmarkt and Berfufsforschung)

  • Conor O’Toole

    (Economic and Social Research Institute (ESRI)
    Trinity College Dublin)

Abstract

The user cost of capital model is a popular tool for assessing the sustainability of house price movements. However, a number of issues typically arise when the approach is applied including the absence of information on consumer price expectations, differences in quality between owner-occupied and rented dwellings and whether agents expectations are rational. In this paper, using a new, unique database of regional housing variables we address these issues in assessing the sustainability of Irish house price changes between 2010 and 2018. We draw on a regular and timely survey of subjective house price expectations amongst Irish households to compile regional-specific user cost of capital variables. In examining the relationship between the user cost of capital and house price to rent ratios, we use developments in local labour markets to establish whether these expectations are determined by economic ``fundamentals” and, hence, not subject to a ``bubble”. Drawing on finance theory, we also present a series of indicators aimed at evaluating the sustainability of price movements.

Suggested Citation

  • Kieran McQuinn & Teresa Monteiro & Conor O’Toole, 2021. "House Price Expectations, Labour Market Developments and the House Price to Rent Ratio: A User Cost of Capital Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 62(1), pages 25-47, January.
    • Handle: RePEc:kap:jrefec:v:62:y:2021:i:1:d:10.1007_s11146-019-09731-x
    DOI: 10.1007/s11146-019-09731-x
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    Cited by:

    1. Coffey, Cathal & Hogan, Paul J. & McQuinn, Kieran & O'Toole, Conor & Slaymaker, Rachel, 2022. "Rental inflation and stabilisation policies: international evidence and the Irish experience," Research Series, Economic and Social Research Institute (ESRI), number RS136, June.
    2. Egan, Paul & McQuinn, Kieran, 2023. "Regime switching and the responsiveness of prices to supply: The case of the Irish housing market," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 82-94.

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    More about this item

    Keywords

    Rents; Prices; User cost;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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