Understanding Irish house price movements - a user cost of capital approach

Frank Browne, Thomas Conefrey and Gerard Kennedy
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Frank Browne: Central Bank of Ireland
Gerard Kennedy: Central Bank of Ireland

No 04/RT/13, Research Technical Papers from Central Bank of Ireland

Abstract: This paper employs the user cost of capital to examine Irish house price movements. The bundle of services afforded by a dwelling can be accessed either by renting the dwelling or by outright purchase. Between 2002 and 2007, a combination of factors including rapid house price appreciation and the prevailing fiscal and monetary environment created a strong bias towards homeownership. This was reflected in a negative user cost of housing as capital gains exceeded funding costs (both direct mortgage cost and the opportunity cost) thereby incentivising home ownership and fuelling further increases in prices. We find that the collapse in house prices since 2007 has contributed to a reversal of this process. From mid-2007 onwards, the user cost has soared as capital losses have greatly exceeded the funding costs (albeit falling) causing house prices to fall further. Both fiscal and financial policy measures which could enable a more efficient functioning of the housing market are discussed.

Keywords: house prices; user cost; bubbles; rents; equilibrium (search for similar items in EconPapers)
JEL-codes: E62 R3 R31 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-eur and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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