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Credit conditions and the housing price ratio: evidence from Ireland's bubble and crash

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  • Ronan C Lyons

    () (Department of Economics, Trinity College Dublin)

Abstract

The Great Recession starting in 2007 has refocused attention on the importance of understanding housing market dynamics as contributors to macroeconomic fluctuations. While the sale-to-rent ratio of housing prices is generally regarded as a fundamental barometer of housing market health, the study of its determinants remains in its infancy. This paper examines the housing price ratio in Ireland, during an extreme housing market cycle. Using new data on first-time buyer loan-to-value (LTV) ratios, a one-step error correction model of the housing price ratio in Ireland is presented for the first time. Covering the period 2000-2012, it finds clear evidence that, alongside user cost, credit conditions were central in determining equilibrium in the housing market, which saw rapid adjustment in the ratio in response to changes in its determinants. The results imply that an increase in the LTV by 10pp would have associated with a fall in the yield in 2012 from 5.6% to 5.2% in equilibrium. Overall, the results suggest that simplistic models of the housing price ratio, depending solely on user cost, are lacking. The importance of credit conditions is a finding with implications for other markets and for macro-prudential policy.

Suggested Citation

  • 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.
  • Handle: RePEc:tcd:tcduee:tep0717
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    File URL: https://www.tcd.ie/Economics/TEP/2017/TEP0717.pdf
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    References listed on IDEAS

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    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
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    3. Holly, Sean & Jones, Natasha, 1997. "House prices since the 1940s: Cointegration, demography and asymmetries," Economic Modelling, Elsevier, vol. 14(4), pages 549-565, October.
    4. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    5. Addison-Smyth, Diarmaid & McQuinn, Kieran & O'Reilly, Gerard, 2009. "Modelling Credit in the Irish Mortgage Market," The Economic and Social Review, Economic and Social Studies, vol. 40(4), pages 371-392.
    6. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, May.
    7. Brent W. Ambrose & Piet Eichholtz & Thies Lindenthal, 2013. "House Prices and Fundamentals: 355 Years of Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 477-491, March.
    8. repec:mcb:jmoncb:v:45:y:2013:i::p:477-491 is not listed on IDEAS
    9. Kennedy, Gerard & McIndoe-Calder, Tara, 2012. "The Irish Mortgage Market: Stylised Facts, Negative Equity and Arrears," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-108, February.
    10. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 729-752.
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    12. Simon Stevenson, 2003. "Economic, Demographic and Fiscal Influences on Housing Market Dynamics," ERES eres2003_266, European Real Estate Society (ERES).
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. John J. Garcia-Rendon & Natalia Cadavid Arcila & Erika Tatiana Aristizábal Zuluaga, 2018. "Efectos del crédito hipotecario sobre el precio de la vivienda nueva NO VIS en Medellín," DOCUMENTOS DE TRABAJO CIEF 016976, UNIVERSIDAD EAFIT.
    2. John Jairo García & Nathalia Cadavid & Érika Aristizábal, 2018. "Efectos del crédito hipotecario sobre el precio de la vivienda nueva NO VIS en Medellín," DOCUMENTOS DE TRABAJO CIEF 017009, UNIVERSIDAD EAFIT.

    More about this item

    Keywords

    Housing markets; housing bubbles; price-rent ratio; credit conditions; Ireland.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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