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Understanding Irish house price movements - a user cost of capital approach

Author

Listed:
  • Browne, Frank

    (Central Bank of Ireland)

  • Conefrey, Thomas

    (Central Bank of Ireland)

  • Kennedy, Gerard

    (Central Bank of Ireland)

Abstract

This paper employs the user cost of capital to examine Irish house price movements. The bundle of services afforded by a dwelling can be accessed either by renting the dwelling or by outright purchase. Between 2002 and 2007, a combination of factors including rapid house price appreciation and the prevailing fiscal and monetary environment created a strong bias towards homeownership. This was reflected in a negative user cost of housing as capital gains exceeded funding costs (both direct mortgage cost and the opportunity cost) thereby incentivising home ownership and fuelling further increases in prices. We find that the collapse in house prices since 2007 has contributed to a reversal of this process. From mid-2007 onwards, the user cost has soared as capital losses have greatly exceeded the funding costs (albeit falling) causing house prices to fall further. Both fiscal and financial policy measures which could enable a more efficient functioning of the housing market are discussed.

Suggested Citation

  • Browne, Frank & Conefrey, Thomas & Kennedy, Gerard, 2013. "Understanding Irish house price movements - a user cost of capital approach," Research Technical Papers 04/RT/13, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:04/rt/13
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    File URL: https://centralbank.ie/docs/default-source/publications/research-technical-papers/research-technical-paper-04rt13.pdf?sfvrsn=8
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    References listed on IDEAS

    as
    1. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
    2. Meen, Geoffrey P, 1990. "The Removal of Mortgage Market Constraints and the Implications for Econometric Modelling of UK House Prices," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(1), pages 1-23, February.
    3. Diaz-Serrano, Luis, 2005. "Income volatility and residential mortgage delinquency across the EU," Journal of Housing Economics, Elsevier, vol. 14(3), pages 153-177, September.
    4. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
    5. Duffy, David, 2011. "User Cost and Irish House Prices," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), issue 3-Autumn.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Clancy, Daragh & Cussen, Mary & Lydon, Reamonn, 2014. "Housing market developments and household consumption," Economic Letters 09/EL/14, Central Bank of Ireland.
    2. Cronin, David & McQuinn, Kieran, 2016. "Credit availability, macroprudential regulations and the house price-to-rent ratio," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 971-984.
    3. Cronin, David & McQuinn, Kieran, 2017. "Credit conditions and tenure choice: a cross-country examination," Papers WP582, Economic and Social Research Institute (ESRI).
    4. Ronan C Lyons, 2017. "Credit conditions and the housing price ratio: evidence from Ireland's bubble and crash," Trinity Economics Papers tep0717, Trinity College Dublin, Department of Economics.
    5. Visar Hoxha & Alenka Temeljotov Salaj, 2014. "Fundamental Economic Factors That Affect Housing Prices: Comparative Analysis between Kosovo and Slovenia," Management, University of Primorska, Faculty of Management Koper, vol. 9(4), pages 323-348.
    6. Ryan Fox & Peter Tulip, 2014. "Is Housing Overvalued?," RBA Research Discussion Papers rdp2014-06, Reserve Bank of Australia.
    7. Alain Galli, 2016. "How reliable are cointegration-based estimates for wealth effects on consumption? Evidence from Switzerland," Working Papers 2016-03, Swiss National Bank.
    8. Kennedy, Gerard & O'Brien, Eoin & Woods, Maria, 2016. "Assessing the sustainability of Irish residential property prices: 1980Q1-2016Q2," Economic Letters 11/EL/16, Central Bank of Ireland.
    9. Carmen Silva & Camilo Vio, 2015. "Housing prices and macroeconomic factors: evidence from Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 18(1), pages 4-24, April.
    10. Niall McInerney, 2016. "A Structural Model of Macroprudential Policy: the Case of Ireland," EcoMod2016 9643, EcoMod.

    More about this item

    Keywords

    house prices; user cost; bubbles; rents; equilibrium;

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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