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

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  • 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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    References listed on IDEAS

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    Cited by:

    1. Brian Micallef & Nathaniel Debono, 2020. "The rental sector and the housing block in STREAM," CBM Working Papers WP/03/2020, Central Bank of Malta.
    2. Clancy, Daragh & Cussen, Mary & Lydon, Reamonn, 2014. "Housing market developments and household consumption," Economic Letters 09/EL/14, Central Bank of Ireland.
    3. 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.
    4. Lyons, Ronan C., 2018. "Credit conditions and the housing price ratio: Evidence from Ireland’s boom and bust," Journal of Housing Economics, Elsevier, vol. 42(C), pages 84-96.
    5. Cronin, David & McQuinn, Kieran, 2017. "Credit conditions and tenure choice: a cross-country examination," Papers WP582, Economic and Social Research Institute (ESRI).
    6. 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.
    7. 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.
    8. Ryan Fox & Peter Tulip, 2014. "Is Housing Overvalued?," RBA Research Discussion Papers rdp2014-06, Reserve Bank of Australia.
    9. Richard Keely & Ronan C. Lyons, 2022. "Housing Prices, Yields and Credit Conditions in Dublin since 1945," The Journal of Real Estate Finance and Economics, Springer, vol. 64(3), pages 404-439, April.
    10. 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.
    11. David Byrne & David Duffy & John FitzGerald, 2018. "Household Formation and Tenure Choice: Did the Great Irish Housing Bust Alter Consumer Behaviour?," The Economic and Social Review, Economic and Social Studies, vol. 49(3), pages 287-317.
    12. Alain Galli, 2017. "How Reliable are Cointegration-Based Estimates for Wealth Effects on Consumption? Evidence from Switzerland," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 153(4), pages 437-479, October.
    13. 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.
    14. Voigtländer, Michael & Schuster, Florian, 2019. "European office markets, user costs and speculative bubbles," IW-Reports 31/2019, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    15. 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.
    16. Richard Keely & Ronan C Lyons, 2019. "Debt and Taxes: The Sale-Rent Housing Price Ratio in Dublin since 1945," Trinity Economics Papers tep0419, Trinity College Dublin, Department of Economics.
    17. Mahlape Mohale & Hermanus Stephanus Geyer Jr. & Hermanus Stephanus Geyer, 2016. "Undervaluation of Real Estate Properties in Disadvantaged Areas in the City of Johannesburg," South African Journal of Economics, Economic Society of South Africa, vol. 84(2), pages 217-229, June.
    18. Niall McInerney, 2016. "A Structural Model of Macroprudential Policy: the Case of Ireland," EcoMod2016 9643, EcoMod.
    19. Gerlach-Kristen, Petra & Mc Inerney, Niall, 2014. "The Role of Credit in the Housing Market," Papers WP495, Economic and Social Research Institute (ESRI).

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    More about this item

    Keywords

    house prices; user cost; bubbles; rents; equilibrium;
    All these keywords.

    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; Modern Monetary Theory

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