House prices Interesting things to note from last lecture: • Big swings in many countries • Peaks near business cycles • Timing of peaks across countries
House 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 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? • Roche, M. (2003) “Will there be a crash in Irish house prices?” ESRI QEC, Winter • The technical analysis in Section 3 can be skipped.
Are house prices in Ireland close to their “fundamental” values or is there a “bubble”? • Fundamentals supply and demand • Bubble price rises driven by expectations of future price rises
Demand side factors • Disposable income • Demographics • Bugle in the peak house-buying aged population • Migration • Interest rates
Supply side factors • House completions • Land costs • Building costs
Findings • No bubble • House prices explained by fundamentals • Rising land prices key fundamental BUT: • Is there a bubble in land prices?