Imbalances Versus Fundamentals -- An Econometric Analysis of House Prices in Ireland
32 Pages Posted: 10 Jul 2014
Date Written: July 8, 2014
In the past two decades the Irish real estate market experienced the most pronounced housing boom-bust cycle among all OECD countries. In this paper, we propose a model for residential real estate prices in Ireland distinguishing the effect of fundamental drivers and imbalances. We use a cointegration framework with yearly data from 1975 to 2013. The framework adds to existing literature by capturing the impact of mortgage lending through a proxy variable which overcomes a number of shortcomings in recent studies. We find that increasing disposable income and demographic factors have been the main fundamental drivers of house prices during the boom, while lower mortgage interest rates and increased mortgage lending also contributed significantly to skyrocketing real estate prices. During the bust, the sharp decline in mortgage lending was the single most important factor in the house price collapse, exceeding the effects of falling disposable income and reduced population growth due to the reversal of migration flows. Based on econometric estimations we found that during the bust, real estate prices undershot the ‘equilibrium’ price level significantly.
Keywords: House Prices, Fundamentals, Mortgage Lending, Cointegration
JEL Classification: R3, R31, G21
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