Macroeconomic developments in the Irish housing market DATE 21 st - - PowerPoint PPT Presentation

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Macroeconomic developments in the Irish housing market DATE 21 st - - PowerPoint PPT Presentation

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Macroeconomic developments in the Irish housing market DATE 21 st June 2018 Event Exploring developments in the Irish housing & mortgage market VENUE ESRI, Whitaker Square, Sir John Rogersons Quay, Dublin 2 AUTHOR Kieran McQuinn

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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

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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
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Outline

  • Addresses “stability” of current price levels
  • Using a number of approaches
  • Cross-country comparisons
  • Econometric estimates of:
  • Fundamental House Prices
  • Conclusions
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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

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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

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  • Take the average cross-country ratio
  • 𝑄𝑢

𝐽𝑢 𝐵

  • Multiply it by the Irish index of disposable income
  • 𝑄𝐽𝑢

𝐷𝐺 = 𝐽𝐽𝑢 × 𝑄𝑢 𝐽𝑢 𝐵

  • Scenario suggests:
  • Overvaluation in 2006/2007 period followed by
  • Undervaluation from 2008 onward

Counter-factual analysis

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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

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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

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Comparison with certain US cities

Source: Author’s Analysis

5 10 15 20 25 30 35 40 45 50

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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

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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)

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  • 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

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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

In Logs

Actual Model 1 Model 2 Model 3

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Deviation from fundamental prices (%)

Source: Author’s Analysis

  • 40
  • 30
  • 20
  • 10

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

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  • 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

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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

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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

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  • 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?

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  • 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

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Where are recent price increases coming from?

  • 30
  • 20
  • 10

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

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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
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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

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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

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Influence of Credit Provision

  • This responsiveness to credit provision should vary
  • ver 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

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Influence of Credit Provision

Credit Elasticity of House Prices

Source: Author’s Analysis

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  • 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

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  • 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