It’s worth looking at what the ESRI’s report says about housing and how it comes to that conclusion. I’ve copied the “box” from the report which goes into detail on the housing market below.
*Introduction*
One of the sectors of both the domestic and international economies most impacted by the COVID-19 pandemic has been the housing market (IMF, 2021). The reduction in consumption along with significant levels of government payments offered during the pandemic led to an accumulation of savings for certain households, which some survey evidence (European Commission Consumer Sentiment Survey)” would suggest fuelled housing demand, while public-health related lockdowns, the disruptions to supply-chains, coupled with the increase in inflationary pressures had an adverse impact on housing supply.
The Irish housing market is a particular example of this pandemic-related impact. Figures B.1 and B.2 plot nominal Irish house price levels and year-on-year growth from 2005 to 2022.
The turbulent nature of the Irish housing market over the period 2006 to the present is
clearly apparent with Irish house price levels rising sharply up until 2007, declining
significantly through 2008-2013 and recovering persistently thereafter. Previous
contributions have analysed the post-2013 recovery in house prices (McQuinn, 2014;
2017).
However, what is also clear from Figure B.2 is that immediately prior to the pandemic, Irish
house price growth had cooled significantly. Annual nominal growth in prices had, from
Q1 2019 to Q1 2020 slowed considerably. However, once the pandemic impacted
(Q2 2020), annual increases picked up swiftly reaching a peak of 15 per cent in Q1 2022
*Model based assessment of current price levels*
Based on the model of house prices in Bergin and Egan (2022), the following model is
estimated:
Where ππ‘
is house price levels, π΄π‘
is an affordability indicator, which combines household disposable income and mortgage interest rates (used in McQuinn, 2014; 2017). πΆπΆπ‘
is a credit conditions indicator, similar to that used in Kelly and McQuinn (2014), πΆπ΄ππ‘
is a
housing stock variable and ππ π΄ππ‘
is the ratio of the population in the key house purchasing
cohort (25-44 years of age)
The model is estimated over the period 1981-2021 and the actual prices and model- based estimates are compared in Figure B.3.
From the graph it is clear that there appeared to be significant under-valuation in the Irish market in the period up to 2018. This was a fall-out from the significant reduction in prices which occurred after the great financial crisis (GFC). House prices increased sharply and persistently during this period. From 2018 through 2020, the housing market was in equilibrium with actual prices and those suggested by the model being practically the same. However, a divergence has emerged over the past 18 months with actual house prices now somewhat larger than those suggested by the model. The difference is plotted in Figure B.4.
What are the causes and implications of such over-valuation? Unlike the period prior to 2007 when there was also significant over-valuation, excess credit is unlikely to be a factor. The model contains a credit conditions indicator and while credit levels have increased over the past number of years, they have not done so on an unsustainable basis.
One reason for the overvaluation relative to the model could be the increasing share of non-household purchasers. For example, if there are more institutional investors, local authorities or other AHBS purchasing housing units in the market, then they will not be impacted in the same way by the variables included in (1). They may, for example, be more influenced by their own financing conditions and government spending in the area.
Another likely cause of recent house price movements is the sizeable increase in savings accumulated in aggregate by Irish households during the pandemic. As noted earlier, survey evidence would indicate that Irish households may be using some of these savings in the residential market. Figure B.5 plots the Irish household savings ratio over the period Q1 2018 Q2 2022 with the substantial increase in 2020 apparent; between 2012 and 2019 savings in aggregate terms averaged β¬2.3 billion per quarter, in 2020 and 2021 this jumped to over β¬8 billion.
It is entirely likely that some of these excess savings have found their way into the Irish housing market. If this is the case, then technically speaking there may not be overvaluation in the market, as the recent increases in prices may be explained by the heightened savings levels.However, even if the increase in prices can be explained by these developments, it is clear, going forward, that the recent surge in savings and wealth is not sustainable over the medium term. Therefore, changes in house prices will become re-aligned with movements in income over this period. This means that recent increases in house prices are likely to moderate substantially over the short to medium term. This is likely to be compounded by the declines in real income which many households are set to experience in 2022 as well as the significant uncertainty generally associated with macroeconomic developments. Furthermore, as identified by McQuinn (2022), the recent and future expected increases in mortgage interest rates will, in themselves, have a contractionary impact on house prices. One factor which may prop up house prices is the likely impact of recent inflationary pressures on housing supply with housing commencements in 2022 down somewhat for the year to date compared with 2021.
Try 70%
May?
‘may be over valued by 7%’. Why not by 17% or 27%. This article has zero value
6 comments
Only 7%?
It’s worth looking at what the ESRI’s report says about housing and how it comes to that conclusion. I’ve copied the “box” from the report which goes into detail on the housing market below.
*Introduction*
One of the sectors of both the domestic and international economies most impacted by the COVID-19 pandemic has been the housing market (IMF, 2021). The reduction in consumption along with significant levels of government payments offered during the pandemic led to an accumulation of savings for certain households, which some survey evidence (European Commission Consumer Sentiment Survey)” would suggest fuelled housing demand, while public-health related lockdowns, the disruptions to supply-chains, coupled with the increase in inflationary pressures had an adverse impact on housing supply.
The Irish housing market is a particular example of this pandemic-related impact. Figures B.1 and B.2 plot nominal Irish house price levels and year-on-year growth from 2005 to 2022.
[Figure B.1](https://i.imgur.com/XgmDgnc.png)
[Figure B.2](https://i.imgur.com/1u8YIOJ.png)
The turbulent nature of the Irish housing market over the period 2006 to the present is
clearly apparent with Irish house price levels rising sharply up until 2007, declining
significantly through 2008-2013 and recovering persistently thereafter. Previous
contributions have analysed the post-2013 recovery in house prices (McQuinn, 2014;
2017).
However, what is also clear from Figure B.2 is that immediately prior to the pandemic, Irish
house price growth had cooled significantly. Annual nominal growth in prices had, from
Q1 2019 to Q1 2020 slowed considerably. However, once the pandemic impacted
(Q2 2020), annual increases picked up swiftly reaching a peak of 15 per cent in Q1 2022
*Model based assessment of current price levels*
Based on the model of house prices in Bergin and Egan (2022), the following model is
estimated:
ln ππ‘ = πΌ + π½1πππ΄π‘ + π½2πΆπΆπ‘ + π½3ππ π΄ππ‘ + π½4πΆπ΄ππ‘
Where ππ‘
is house price levels, π΄π‘
is an affordability indicator, which combines household disposable income and mortgage interest rates (used in McQuinn, 2014; 2017). πΆπΆπ‘
is a credit conditions indicator, similar to that used in Kelly and McQuinn (2014), πΆπ΄ππ‘
is a
housing stock variable and ππ π΄ππ‘
is the ratio of the population in the key house purchasing
cohort (25-44 years of age)
The model is estimated over the period 1981-2021 and the actual prices and model- based estimates are compared in Figure B.3.
[Figure B.3](https://i.imgur.com/uGJapqB.png)
From the graph it is clear that there appeared to be significant under-valuation in the Irish market in the period up to 2018. This was a fall-out from the significant reduction in prices which occurred after the great financial crisis (GFC). House prices increased sharply and persistently during this period. From 2018 through 2020, the housing market was in equilibrium with actual prices and those suggested by the model being practically the same. However, a divergence has emerged over the past 18 months with actual house prices now somewhat larger than those suggested by the model. The difference is plotted in Figure B.4.
[Figure B.4](https://i.imgur.com/THKpJkJ.png)
*Causes and implications*
What are the causes and implications of such over-valuation? Unlike the period prior to 2007 when there was also significant over-valuation, excess credit is unlikely to be a factor. The model contains a credit conditions indicator and while credit levels have increased over the past number of years, they have not done so on an unsustainable basis.
One reason for the overvaluation relative to the model could be the increasing share of non-household purchasers. For example, if there are more institutional investors, local authorities or other AHBS purchasing housing units in the market, then they will not be impacted in the same way by the variables included in (1). They may, for example, be more influenced by their own financing conditions and government spending in the area.
[Figure B.5](https://i.imgur.com/VKYvPyb.png)
Another likely cause of recent house price movements is the sizeable increase in savings accumulated in aggregate by Irish households during the pandemic. As noted earlier, survey evidence would indicate that Irish households may be using some of these savings in the residential market. Figure B.5 plots the Irish household savings ratio over the period Q1 2018 Q2 2022 with the substantial increase in 2020 apparent; between 2012 and 2019 savings in aggregate terms averaged β¬2.3 billion per quarter, in 2020 and 2021 this jumped to over β¬8 billion.
It is entirely likely that some of these excess savings have found their way into the Irish housing market. If this is the case, then technically speaking there may not be overvaluation in the market, as the recent increases in prices may be explained by the heightened savings levels.However, even if the increase in prices can be explained by these developments, it is clear, going forward, that the recent surge in savings and wealth is not sustainable over the medium term. Therefore, changes in house prices will become re-aligned with movements in income over this period. This means that recent increases in house prices are likely to moderate substantially over the short to medium term. This is likely to be compounded by the declines in real income which many households are set to experience in 2022 as well as the significant uncertainty generally associated with macroeconomic developments. Furthermore, as identified by McQuinn (2022), the recent and future expected increases in mortgage interest rates will, in themselves, have a contractionary impact on house prices. One factor which may prop up house prices is the likely impact of recent inflationary pressures on housing supply with housing commencements in 2022 down somewhat for the year to date compared with 2021.
Try 70%
May?
‘may be over valued by 7%’. Why not by 17% or 27%. This article has zero value
They forgot the 1 infront of that