The Housing Market and the Macroeconomy: Evidence From Ireland
This paper provides an empirical assessment of the important linkages which may exist between the housing sector and several key macroeconomic variables. The analysis focuses on (i) the effects of rising real incomes on house prices, (ii) the impact of monetary policy, i.e. interest rates, on developments in the housing market, (iii) the nature and speed of price adjustment in the housing market, (iv) the nature and speed of supply adjustment in the housing market and (v) potential impacts of rising real house prices on real consumption. The key empirical result in the paper is the identification of two long-run relationships which capture the fundamental economic behaviour on both the demand and supply sides of the housing market. In the long-run, the demand side of the market can be modelled using a stable relationship between house prices, the housing stock, income and mortgage interest rates. It was discovered that an increase in income results in a proportional rise in the long-run demand for housing. In addition, the demand for housing responds negatively and proportionately to increases in the price of housing. Mortgage interest rates were also shown to exert a significant negative effect on the demand for housing. To model the supply side of the market, the empirical section of the paper tested the data for the existence of a stable ratio of house prices to construction costs which is consistent with "normal profits" in the house building sector. The housing stock is shown to adjust positively in order to ensure the stability of this profit ratio. Based on this characterisation of housing demand and supply, it would seem possible to explain much of the recent rise in house prices as an efficient relative price change in the presence of very sluggish supply adjustment. In addition, the model suggests that, given the short-run fixity of supply, it is reasonable to expect that house prices will overshoot their equilibrium level and then subsequently decline somewhat.
|Date of creation:||Mar 1998|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (01) 671 6666
Fax: (01) 671 6561
Web page: http://www.centralbank.ie
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Artle, Roland & Varaiya, Pravin, 1978. "Life cycle consumption and homeownership," Journal of Economic Theory, Elsevier, vol. 18(1), pages 38-58, June.
- Pesaran, M. Hashem & Shin, Yongcheol, 1996.
"Cointegration and speed of convergence to equilibrium,"
Journal of Econometrics,
Elsevier, vol. 71(1-2), pages 117-143.
- Pesaran, M.H. & Shin, Y., 1993. "Cointegration and Speed of Convergence to Equilibrium," Cambridge Working Papers in Economics 9311, Faculty of Economics, University of Cambridge.
- James M. Poterba, 1983.
"Tax Subsidies to Owner-occupied Housing: An Asset Market Approach,"
339, Massachusetts Institute of Technology (MIT), Department of Economics.
- Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
- Hakfoort, Jacco & Matysiak, George, 1997. "Housing investment in the Netherlands," Economic Modelling, Elsevier, vol. 14(4), pages 501-516, October.
- Johansen, Soren & Juselius, Katarina, 1994.
"Identification of the long-run and the short-run structure an application to the ISLM model,"
Journal of Econometrics,
Elsevier, vol. 63(1), pages 7-36, July.
- Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
- Takatoshi Ito & Keiko Nosse Hirono, 1993.
"Efficiency of the Tokyo Housing Market,"
Monetary and Economic Studies,
Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(1), pages 1-32, July.
- Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
- Salo, Sinikka, 1994. "Modelling the Finnish housing market," Economic Modelling, Elsevier, vol. 11(2), pages 250-265, April.
- Chow, Gregory C & Lin, An-loh, 1971.
"Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series,"
The Review of Economics and Statistics,
MIT Press, vol. 53(4), pages 372-75, November.
- Tom Doan, . "CHOWLIN: RATS procedure to distribute a series to a higher frequency using related series," Statistical Software Components RTS00036, Boston College Department of Economics.
- Tom Doan, . "DISAGGREGATE: RATS procedure to implement general disaggregation (interpolation/distribution) procedure," Statistical Software Components RTS00050, Boston College Department of Economics.
- Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
- Johansen, Soren, 1992.
"Determination of Cointegration Rank in the Presence of a Linear Trend,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
- Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
- Joyce M. Manchester & James M. Poterba, 1989.
"Second Mortgages and Household Saving,"
NBER Working Papers
2853, National Bureau of Economic Research, Inc.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March.
- Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
- Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
- Hall, Stephen & Psaradakis, Zacharias & Sola, Martin, 1997. "Switching error-correction models of house prices in the United Kingdom," Economic Modelling, Elsevier, vol. 14(4), pages 517-527, October.
- Jo Corkish & David Miles, 1994. "Inflation, inflation risks and asset returns," Bank of England working papers 27, Bank of England.
- Jonathan S. Skinner, 1996.
"Is Housing Wealth a Sideshow?,"
in: Advances in the Economics of Aging, pages 241-272
National Bureau of Economic Research, Inc.
- Quinn, Terry & Mawdsley, Andrew, 1996. "Forecasting Irish Inflation: A Composite Leading Indicator," Research Technical Papers 4/RT/96, Central Bank of Ireland.
- Duffy, David & FitzGerald, John & Kearney, Ide & Shortall, Fergal, 1997. "Medium-Term Review 1997-2003, No. 6," Forecasting Report, Economic and Social Research Institute (ESRI), number MTR06, December.
When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:1/rt/98. See general 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: (Richard Smith)
If references are entirely missing, you can add them using this form.