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

Ronan Lyons ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Housing markets; Macroprudential policy; Price-rent ratio; Credit conditions; Ireland (search for similar items in EconPapers)
JEL-codes: E32 E44 E51 G12 G21 R21 R31 (search for similar items in EconPapers)
Date: 2018-06-18
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Published in Journal of Housing Economics, 18, June, 2018. ISSN: 1051-1377

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http://eprints.lse.ac.uk/88773/ Open access version. (application/pdf)

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