Regime switching and the responsiveness of prices to supply: The case of the Irish housing market

Paul Egan and Kieran McQuinn

The Quarterly Review of Economics and Finance, 2023, vol. 87, issue C, 82-94

Abstract: Understanding the impact of housing supply on housing price inflation is a particularly important issue from a policy-maker’s perspective. Notwithstanding the impact of the great financial crisis (GFC) in 2007/08, the past 25 years has seen a significant increase in housing prices across a number of western economies. More recently, across countries, a common characteristic observed in housing markets appears to be the increase in price inflation in the aftermath of the Covid-19 pandemic. A key question which arises is whether housing price inflation can be assuaged somewhat by greater levels of housing supply? In this paper, we seek to quantify the impact of additional supply on price inflation in the Irish property market. While residential property markets in many countries experienced substantial swings in activity since the early 1990s, the Irish market has demonstrated particular volatility. Given such a high degree of volatility, it is plausible that the relationship between housing prices and its fundamental drivers could have changed over time. Crucially, therefore, we address this question using both a multiple breakpoint model and a Markov switching model to allow for the presence of structural changes in the Irish residential market over the period 1981–2019. Our results indicate a complex relationship between additional supply and house prices, with the impact varying over time.

Keywords: Housing Prices; Housing Supply; Breakpoints; Markov switching.JEL codes: E42; E51; R31 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:87:y:2023:i:c:p:82-94

DOI: 10.1016/j.qref.2022.12.001

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