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Credit conditions and the housing price ratio: evidence from Ireland’s boom and bust

Lyons, Ronan C. (2018) Credit conditions and the housing price ratio: evidence from Ireland’s boom and bust. Journal of Housing Economics. ISSN 1051-1377

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Identification Number: 10.1016/j.jhe.2018.05.002

Abstract

The Great Recession starting in 2007 has refocused attention on the importance of understanding housing market dynamics as contributors to macroeconomic fluctuations. While the sale-to-rent ratio of housing prices is generally regarded as a fundamental barometer of housing market health, the study of its determinants remains in its infancy. This paper examines the housing price ratio in Ireland since 2000, a period including an extreme housing market cycle. Using new data on first-time buyer loan-to-value ratios, a one-step error correction model of the housing price ratio in Ireland is presented for the first time. It finds clear evidence that, alongside user cost, credit conditions were central in determining equilibrium in the housing market. Throughout, and especially earlier in the sample, there is rapid adjustment of the housing price ratio to its implied equilibrium relation. There is evidence that the housing market regime changed during the period, in 2010 and again in 2014/2015. The preferred specifications imply that a ten percentage point increase in the median first-time buyer loan-to-value was associated with a 9% rise in sale prices, holding other factors – including rental prices and the system wide ratio of credit to deposits – constant. In addition to an understanding of the Irish market, the findings contribute to the evidence base for macroprudential policies that focus on mortgage lending and also hint at how housing market history may differ across rising and falling markets in forming expectations of capital gains.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-h...
Additional Information: © 2018 Elsevier Inc.
Divisions: Spatial Economics Research Centre
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply; Credit; Money Multipliers
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
R - Urban, Rural, and Regional Economics > R2 - Household Analysis > R21 - Housing Demand
R - Urban, Rural, and Regional Economics > R3 - Production Analysis and Firm Location > R31 - Housing Supply and Markets
Sets: Research centres and groups > Spatial Economics Research Centre
Date Deposited: 28 Jun 2018 10:36
Last Modified: 20 Jul 2019 00:14
Funders: Balliol College Oxford
URI: http://eprints.lse.ac.uk/id/eprint/88773

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