Assessing the sustainability of Irish residential property prices: 1980Q1-2016Q2

Gerard Kennedy, Eoin O'Brien and Maria Woods
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Gerard Kennedy: Central Bank of Ireland
Eoin O'Brien: Central Bank of Ireland
Maria Woods: Central Bank of Ireland

No 11/EL/16, Economic Letters from Central Bank of Ireland

Abstract: Developing indicators to assess the sustainability of house price movements is a key priority for macroprudential policy makers. Using historical data from the 1980s and cross-country comparisons, this Letter presents a number of indicators to support this requirement. The first approach uses a recursive unit root methodology to identify emerging explosive behaviour in prices based on the historical time series properties of the data and the asset-pricing literature. The second approach uses a simple reduced form model and the empirical housing literature to identify a fundamental house price series against which actual developments can be benchmarked. Such approaches can be used to complement traditional statistical indicators of price misalignments such as deviations of the price- to-rent ratio and the price-to-income ratio from their respective historical averages. Both approaches have some success in identifying "bubble" behaviour or overvaluation in the Irish market prior to the Irish crisis. The recovery in Irish house prices since 2013 has meant that the statistical indicators are currently above long-term averages. As at 2016Q2 prices are assessed to remain just below fundamental values using a suite of valuation models and are not suggestive of emerging bubble-like behaviour. Close monitoring of this market is required given the uncertainty associated with house price movements.

Date: 2016-11
New Economics Papers: this item is included in nep-eec and nep-ure
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