1. House prices Interesting things to note from last lecture: Big swings in many countries Peaks near business cycles Timing of peaks across countries

2. House prices Measures of valuation House Prices to Disposable Income House Prices to Rents (Price/Earnings) By either measure, house prices are high in a number of countries

3. Macro Variables around House Price Peaks Look at event graphs: centred on house price peaks Results (Charts 3.1-3.11) Sharp movements coincident with peaks Nominal Policy Rates, CPI peak just after Data highly cyclical

4. Interpretation Both House prices and other macro variables move with business cycle. Could be that: House price swings cause business cycles Business cycle shocks move house prices Bit of both

5. Other factors What could move house prices outside of the business cycle? Demographics (Chart 3.13) Financial Deregulation, Innovation (Tables 3.1 and 3.2) Structural changes Speculation, etc.

6. Will Irish House Prices Fall? Roche, M. (2003) “Will there be a crash in Irish house prices?” ESRI QEC, Winter Roche, M. (2003) “Will there be a crash in Irish house prices?” ESRI QEC, Winter The technical analysis in Section 3 can be skipped. The technical analysis in Section 3 can be skipped.

7. Are house prices in Ireland close to their “fundamental” values or is there a “bubble”? Are house prices in Ireland close to their “fundamental” values or is there a “bubble”? Fundamentals  supply and demand Fundamentals  supply and demand Bubble  price rises driven by expectations of future price rises Bubble  price rises driven by expectations of future price rises

8. Demand side factors Disposable income Disposable income Demographics Demographics Bugle in the peak house-buying aged population Bugle in the peak house-buying aged population Migration Migration Interest rates Interest rates

10. Supply side factors House completions House completions Land costs Land costs Building costs Building costs

12. Findings No bubble No bubble House prices explained by fundamentals House prices explained by fundamentals Rising land prices key fundamental Rising land prices key fundamentalBUT: Is there a bubble in land prices? Is there a bubble in land prices?