Kieran McQuinn delivered this presentation at an ESRI conference titled ‘Second annual conference on the Irish housing and mortgage market' on 13 November 2019. There were two reports launched at the event. This presentation contains key findings from a publication titled 'Assessing price sustainability in the Irish housing market: A county-level analysis’, which can be read here: https://www.esri.ie/publications/assessing-price-sustainability-in-the-irish-housing-market-a-county-level-analysis Photos from the conference are available to view on the ESRI website here: https://www.esri.ie/events/save-the-date-esri-department-of-housing-conference-developments-in-the-irish-housing-and

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@ESRIDublin #ESRIevents #ESRIpublications www.esri.ie
Price Sustainability in the Irish
Regional Housing Market
DATE
13th November 2019
VENUE
Economic and Social
Research Institute (ESRI)
AUTHOR
Kieran McQuinn, Conor
O’Toole, Teresa Monteiro,
Matthew Allen Colgan.

2. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications12 November 20192
• Number of studies have assessed
• Sustainability of the national market
• First programme output:
• McQuinn, Kieran, (2017), Irish house prices: Déjà
vu all over again?
• Given possible heterogeneity in price trends
• Extend this analysis to regional markets?
Motivation

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• New regional house price data (CSO)
• Available from 2010 Q1 onwards
• Much more detailed rental data (ESRI/RTB)
• Available from 2007Q4 – 166 regional indicators!
• Combine this with
• Regional unemployment data
• Regional house price expectations
Data Innovations:

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Database
Variable Source
House Prices CSO
Rents RTB/ESRI Standardised Averages
House Price Expectations ESRI Survey
Unemployment Rate Live Register; Interpolated labour force
data for Census
Housing & Rental Supply CSO Completions; DAFT listings

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- Using a new unique regional database
- Over the period 2013 to 2018
- Examines the role
- house price expectations and
- labour market developments
- Have had on regional housing indicators
- Proposes some new indicators
- Assess sustainability on a county level
What this paper does

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- Housing markets can be characterised by
- Underlying notion of arbitrage
- Returns to investing in housing compare with other assets
- Jorgensen (1963, 1967) Poterba (1984)
- Arbitrage between owner-occupied and rental housing ensures
- House rent to price ratio depends on the real user cost of capital.
- Himmelberg et al (2005) imputed
- Annual rental cost of owning a home
- Measure compares
- Value of living in a property for year, imputed rent, and
- Income lost for not investing in an alternative investment
- opportunity cost of capital.
Price to rent and the user cost

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- Use the house-price to rent ratio as
- A measure of sustainability
- Model HP/Rent as a function of
- User cost and
- Labour market conditions
- Derive indicators
- Based on the user cost approach
Modelling framework

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- 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑡𝑡 = ℎ𝑝𝑝𝑡𝑡 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
+ 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
+ 𝜎𝜎𝑡𝑡 −
∆ℎ𝑝𝑝𝑡𝑡
𝑒𝑒
ℎ𝑝𝑝𝑡𝑡
- Where
- 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑡𝑡 = market rents,
- ℎ𝑝𝑝𝑡𝑡 = house prices,
- 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
+ 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
= the risk free rate and the risk premium rate,
- 𝜎𝜎𝑡𝑡 = the natural rate of depreciation and
-
∆ℎ𝑝𝑝𝑡𝑡
𝑒𝑒
ℎ𝑝𝑝𝑡𝑡
= expected house price appreciation
- Doing some reconfiguring leads to
- Log(ℎ𝑝𝑝𝑡𝑡/𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑡𝑡) = - log(user cost)
House price to rent ratio

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House price to rents - nationallylog
2010 2011 2012 2013 2014 2015 2016 2017 2018
2.85
2.90
2.95
3.00
3.05
3.10
3.15

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Regional house price to rent ratios
Cork
2010 2011 2012 2013 2014 2015 2016 2017 2018
16
18
20
22
24
26
28
30
32
Dublin
2010 2011 2012 2013 2014 2015 2016 2017 2018
16
18
20
22
24
26
28
30
Galway
2010 2011 2012 2013 2014 2015 2016 2017 2018
10
12
14
16
18
20
22
24
26
Limerick
2010 2011 2012 2013 2014 2015 2016 2017 2018
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
Waterford
2010 2011 2012 2013 2014 2015 2016 2017 2018
15
20
25
30
35
40

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Compared with cross-sectional mean
Cork
2010 2011 2012 2013 2014 2015 2016 2017 2018
-0.20
-0.15
-0.10
-0.05
-0.00
0.05
0.10
0.15
0.20
0.25
Dublin
2010 2011 2012 2013 2014 2015 2016 2017 2018
-0.4
-0.3
-0.2
-0.1
-0.0
0.1
0.2
0.3
0.4
Galway
2010 2011 2012 2013 2014 2015 2016 2017 2018
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
-0.0
0.1
0.2
Limerick
2010 2011 2012 2013 2014 2015 2016 2017 2018
-0.50
-0.25
0.00
0.25
0.50
Waterford
2010 2011 2012 2013 2014 2015 2016 2017 2018
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4

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- 𝑙𝑙 ⁄ℎ𝑝𝑝𝑡𝑡,𝑖𝑖 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑡𝑡,𝑖𝑖 = − 𝛽𝛽1 𝑙𝑙 𝑟𝑟𝑡𝑡 −
∆ℎ𝑝𝑝𝑡𝑡,𝑖𝑖
𝑒𝑒
ℎ𝑝𝑝𝑡𝑡,𝑖𝑖
+ 𝜖𝜖𝑡𝑡,𝑖𝑖
- 𝑙𝑙 ℎ𝑝𝑝𝑡𝑡,𝑖𝑖
𝑒𝑒
= 𝛼𝛼1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑡𝑡,𝑖𝑖 + 𝜀𝜀𝑡𝑡,𝑖𝑖
- Key issue: we model price expectations
Estimated model

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Dependent
variable
𝒍𝒍 ⁄𝒉𝒉𝒉𝒉𝒕𝒕,𝒊𝒊 𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒕𝒕,𝒊𝒊 𝒍𝒍 𝒉𝒉𝒉𝒉𝒕𝒕,𝒊𝒊
𝒆𝒆
Coefficient T-Stat Coefficient T-Stat
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑡𝑡,𝑖𝑖 -0.59 -21.47
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑡𝑡,𝑖𝑖 -0.65 -18.45
Summary of results
Note: N = 546. All variables except dummies are logged. Cross-sectional dummies are suppressed

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- Recall rent price ratio:
- 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑡𝑡/ℎ𝑝𝑝𝑡𝑡 = 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
+ 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
−
∆ℎ𝑝𝑝𝑡𝑡
𝑒𝑒
ℎ𝑝𝑝𝑡𝑡
- Ratio can be low:
- Interest rates are low or
- Expectations prices will grow quickly or
- People feel good about risk
- Overvaluation occurs when
- Forecasts of prices are too high or
- Risk premium is too low
Evaluation sustainability in the housing market

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- Combine these two concepts
- Heat index:
∆ℎ𝑝𝑝𝑡𝑡
𝑒𝑒
ℎ𝑝𝑝𝑡𝑡
− 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
= 𝑟𝑟𝑡𝑡
𝑅𝑅𝑅𝑅
− 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑡𝑡/ℎ𝑝𝑝𝑡𝑡
- House prices more likely to be overvalued when
- The index is high
- When rents yields are low relative to the interest rate
- When overvalued
- Expectations of house price too high and/or
- Households risk premiums are too low
- Eventually, estimates of risk increase causing
- Both housing demand and prices to fall
A “heat” index of the housing market

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Regional heat indices
Cork
2010 2011 2012 2013 2014 2015 2016 2017 2018
-5
-4
-3
-2
-1
0
1
2
3
Dublin
2010 2011 2012 2013 2014 2015 2016 2017 2018
-6
-5
-4
-3
-2
-1
0
1
2
Galway
2010 2011 2012 2013 2014 2015 2016 2017 2018
-7
-6
-5
-4
-3
-2
-1
0
1
2
Limerick
2010 2011 2012 2013 2014 2015 2016 2017 2018
-6
-5
-4
-3
-2
-1
0
1
2
Waterford
2010 2011 2012 2013 2014 2015 2016 2017 2018
-6
-5
-4
-3
-2
-1
0
1
2
3

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Heat index and degree of urbanisation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-5.00 -4.50 -4.00 -3.50 -3.00 -2.50 -2.00 -1.50 -1.00
Urbanisation
Heat Index

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- Examine this both
- Across time (2010 to the present) and
- Across space (all counties)
- To do this we essentially explore
- Sigma convergence:
- Degree of diversion of housing indicators
- Coefficient of variation:
- Standard deviation / Mean
Convergence in housing indicators?

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25.0
30.0
35.0
40.0
45.0
50.0
2010 2014 2018
Sigma convergence – prices

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10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
2010 2014 2018
Sigma convergence – house price to rents

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• Using a new unique regional database
• Examine house price and rental trends
• Across counties between 2010 and 2019
• Rental yields:
• Declined by 1% between 2013 and 2018
• Decline most significant in south east / west
• House price expectations appear
• To be related to “market fundamentals”
• “Heat index” is drifting upwards
• Still somewhat below levels pre 2010
• Evidence suggests significant divergence in prices
Concluding thoughts

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Variable Coefficient T-Stat
Constant 0.153 0.029
House Prices (2010Q1) 0.006 0.014
Beta convergence – regression analysis
Dependent Variable: Average Change in House Prices (2010 – 2019)
• Beta convergence suggests
• Coefficient on house prices should be – and significant