House pricesHouse prices

Interesting things to note from last lecture:

Big swings in many countries Peaks near business cycles Timing of peaks across countries

House pricesHouse prices

Measures of valuation House Prices to Disposable Income House Prices to Rents

(Price/Earnings) By either measure, house prices are

high in a number of countries

Macro Variables around House Price Peaks

Look at event graphs: centred on house price peaks

Results (Charts 3.1-3.11) Sharp movements coincident with

peaks Nominal Policy Rates, CPI peak just

after Data highly cyclical

Interpretation

Both House prices and other macro variables move with business cycle. Could be that:

House price swings cause business cycles

Business cycle shocks move house prices

Bit of both

Other factorsOther factors

What could move house prices outside of the business cycle?

Demographics (Chart 3.13) Financial Deregulation, Innovation

(Tables 3.1 and 3.2) Structural changes Speculation, etc.

Will Irish House Prices Fall?Will Irish House Prices Fall?

Roche, M. (2003) “Will there be a Roche, M. (2003) “Will there be a crash in Irish house prices?” ESRI crash in Irish house prices?” ESRI QEC, WinterQEC, Winter The technical analysis in Section 3 can The technical analysis in Section 3 can

be skipped.be skipped.

Are house prices in Ireland close to Are house prices in Ireland close to their “fundamental” values or is their “fundamental” values or is there a “bubble”?there a “bubble”?

Fundamentals Fundamentals supply and demand supply and demand Bubble Bubble price rises driven by price rises driven by

expectations of future price risesexpectations of future price rises

Demand side factorsDemand side factors

Disposable incomeDisposable income DemographicsDemographics

Bugle in the peak house-buying aged Bugle in the peak house-buying aged populationpopulation

MigrationMigration Interest ratesInterest rates

Supply side factorsSupply side factors

House completionsHouse completions Land costsLand costs Building costsBuilding costs

FindingsFindings

No bubbleNo bubble House prices explained by House prices explained by

fundamentalsfundamentals Rising land prices key fundamentalRising land prices key fundamental

BUT:BUT: Is there a bubble in land prices?Is there a bubble in land prices?