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Macroeconomic developments in the Irish housing market

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This presentation was delivered by Kieran McQuinn at a conference in the ESRI on 21 June 2018 to discuss ongoing research from a joint ESRI/Department of Housing, Planning and Local Government research programme.

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Macroeconomic developments in the Irish housing market

  1. 1. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie Macroeconomic developments in the Irish housing market DATE 21st June 2018 Event Exploring developments in the Irish housing & mortgage market VENUE ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2 AUTHOR Kieran McQuinn Research completed as part of ESRI/Dept of Housing Research Programme on Housing Economics
  2. 2. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie2 21 June 2018 This paper • First part of the housing research programme • McQuinn K. (2017): Irish house prices: Deja vu all over again? Special article, QEC. • Results here are an update of this paper
  3. 3. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie3 21 June 2018 Outline • Addresses “stability” of current price levels • Using a number of approaches • Cross-country comparisons • Econometric estimates of: - Fundamental House Prices • Conclusions
  4. 4. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie4 21 June 2018 Cross-country developments Country Q4 1995 – Q4 2007 Q4 2007 – Q4 2013 Q4 2013 – Q4 2017 Ireland 431 -49 57 UK 240 -7 28 Spain 199 -30 6 France 157 -1 2 US 96 -12 25 Italy 89 -16 -8 Germany -5 13 21 Source: Federal Reserve Bank of Dallas Percentage Change in Nominal Cross-Country House Prices
  5. 5. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie5 21 June 2018 House price to disposable income ratios (2000-2017) Source: Author’s Analysis 40 50 60 70 80 90 100 110 120 2000Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3 Germany Spain France UK Ireland US Average
  6. 6. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 20186 • Take the average cross-country ratio • 𝑃𝑡 𝐼𝑡 𝐴 • Multiply it by the Irish index of disposable income • 𝑃𝐼𝑡 𝐶𝐹 = 𝐼𝐼𝑡 × 𝑃𝑡 𝐼𝑡 𝐴 • Scenario suggests: - Overvaluation in 2006/2007 period followed by - Undervaluation from 2008 onward Counter-factual analysis
  7. 7. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie7 21 June 2018 Irish house prices (2000-2017) Source: Author’s Analysis 40 50 60 70 80 90 100 110 120 130 2000Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3 Counter-factual Actual
  8. 8. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie8 21 June 2018 Irish house price to rent ratio (1990 – 2018) Source: Author’s Analysis 7.5 9.5 11.5 13.5 15.5 17.5 19.5 21.5 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1 2018Q1
  9. 9. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie9 21 June 2018 Comparison with certain US cities Source: Author’s Analysis 0 5 10 15 20 25 30 35 40 45 50
  10. 10. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie10 21 June 2018 House price to rent ratio (Dublin v National) Source: Author’s Analysis 15 16 17 18 19 20 21 22 2008Q2 2009Q2 2010Q2 2011Q2 2012Q2 2013Q2 2014Q2 2015Q2 2016Q2 2017Q2 Ireland_RTB Dublin_RTB
  11. 11. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie11 21 June 2018 Fundamental house price estimates • Common within Irish house price literature; Murphy (2005), Roche (2001; 2003), McQuinn & O’Reilly (2007), Kelly & McQuinn (2014), McQuinn (2014). • Three different econometric specifications i. House prices = ƒ(demographics, disposable income and unemployment rates) ii. House prices = ƒ(affordability and ratio of housing stock to population) iii. House prices = ƒ(disposable income per capita, user cost of capital and housing stock per capita)
  12. 12. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201812 • Results are closely correlated • At present market is ≈ equilibrium • Expected developments in • Affordability, demographics, monetary policy • Low supply response • Continued upward housing demand Fundamental house price estimates
  13. 13. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie13 21 June 2018 Actual and fundamental house price estimates Source: Author’s Analysis 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 5 2000Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3 2018Q1 InLogs Actual Model 1 Model 2 Model 3
  14. 14. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie14 21 June 2018 Deviation from fundamental prices (%) Source: Author’s Analysis -40 -30 -20 -10 0 10 20 30 40 50 60 2000Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3 2018Q1 Model 1 Model 2 Model 3
  15. 15. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201815 • Error-correction model: • Examine future price movements • Forecasting from 2018 to 2020 • Values for capital stock, population levels, disposable income (QEC), • Interest rates (two scenarios); constant & gradually increasing rate Future scenario
  16. 16. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie16 21 June 2018 Future interest rate scenarios (%) Source: Author’s Analysis 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1 2018Q1 2020Q1 Scenario 1 Scenario 2
  17. 17. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie17 21 June 2018 Historical and future house price levels (index) Source: Author’s Analysis 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 140.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1 2018Q1 2020Q1 Scenario 1 Scenario 2
  18. 18. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201818 • Prices fall due to • Collapse of a bubble - No sign of one yet • Significant deterioration in “fundamentals” - Increase in mortgage rates? - Sudden decline in income levels? - Sharp rise in unemployment • Most unlikely Could house prices fall in short-run?
  19. 19. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201819 • If prices are in equilibrium • Should move in line with fundamentals? • Across countries: - Income elasticity of house prices ≈ 1.5 – 2.0 % • Most commentators: - Forecast income growth of 3.5 to 4 % • Suggests house price increases of 6.5%? Back of the envelope assessment
  20. 20. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201820 Where are recent price increases coming from? -30 -20 -10 0 10 20 30 2011 2012 2013 2014 2015 2016 2017 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Figure: Annual Growth (%) in average purchased property prices per quintile Source: Property Price Register
  21. 21. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie21 21 June 2018 Housing demand now: • Price increases • More significant at the lower end of the distribution (prices) • Affordability challenges now more pressing • For the lower end of the income distribution? • Macro prudential regulations • Limiting demand at the high end of the price distribution? • If so • Similar to other markets – London for example
  22. 22. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie22 21 June 2018 How elastic are prices w.r.t. supply? • Forecast assumes: • Sensitivity: • Keep supply fixed at 18,500 units per annum • House prices only 0.5 per cent higher than baseline • Point to note: • Estimates generated during Celtic Tiger era Year Supply 2018 23,400 2019 29,700 2020 36,700
  23. 23. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie23 21 June 2018 The role of credit: • Models assumes a steady-state relationship wherein credit conditions do not change • Any changes in mortgage credit availability would have a strong influence on future house prices • Models can be augmented to include an indicator for mortgage credit supply (Duca et al. 2014) • 1.0 per cent increase in credit supply estimated to contribute towards a 0.4 per cent increase in prices
  24. 24. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie24 21 June 2018 Influence of Credit Provision • This responsiveness to credit provision should vary over time as credit conditions change • McQuinn (2017) provides an alternative indicator of mortgage credit provision, producing a time-varying estimate • Enables the observation of responsiveness of house prices to changing credit conditions under an Irish context
  25. 25. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie25 21 June 2018 Influence of Credit Provision Credit Elasticity of House Prices Source: Author’s Analysis
  26. 26. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201826 • House price levels converging to fundamental value • High growth due to • Past overcorrection in prices & • Recent improvements in economic variables • Given the likely strong increase in housing demand • Economic growth, labour market and demographics • Policy should avoid further stimulating demand Specific conclusions
  27. 27. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications21 June 201827 • Irish market characterised by significant volatility • Since 1995: • Significant fluctuations in prices and supply • Gives rise to speculative behaviour • Which, in turn accentuates the cycle • Policy needs to smooth the cycle • Land market management • Macroprudential policy (credit) • Tax treatment General conclusions

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