Category Archives: house price bubble

28/5/19: Why some long trend estimates start looking shaky for Ireland’s property markets

There are many ways for analysing the long-term trends in real estate prices. One way is to use dynamics for the periods when price appreciation was consistent with underlying economic growth fundamentals and project price levels forward at the rates, on average, compatible with these periods.

And some exercises in assessing Irish house prices relative to trend are starting to sound like an early alarm bell going off.

In Ireland's case, organic growth-based period of the Celtic Tiger can be traced to, roughly, 1992/1993 through 1998. In terms of real estate prices (housing), this period corresponds to the post-1987 recovery of 1988-1990, followed by a house price 'recession' of 1991-1993 and onto the period of recovery and economic growth-aligned appreciation of 1994-1996. During this period, average price inflation in Irish house prices was 3.94% per annum.

Using the data from 1970 through 2018 based on the time series from the BIS and CSO, we can compare current price indices to those that would have prevailed were the 1988-1996 trend growth to continue through 2018. Chart below shows the results:

Several things worth noting:

  1.  At the end of 2018, Irish house price index stood some 5.7 percent below where it would have been if the longer term trend prevailed from 1997 on.
  2. Taking into the account moderating house price growth of 2016-2018 and projecting house prices forward from 2018 levels onto 2022 shows that by the end of 1Q 2020, Irish house prices can be expected to catch up with the longer-term trend.
  3. The longer-term trend does capture quite well the effect of the massive price bubble of 1998-2007: the trend line hits almost exactly the 2009-2018 index average at 2010-2011. 
  4. The pre-crisis peak levels of house prices can be expected to reach (on-trend) by 2022 implying that the house price bubble of 1998-2007 has, in effect, accelerated house price inflation by roughly 15 years, or 50-62 percent of the 25-30 year mortgage duration, which is consistent with the peak-to-trough decline in Irish house prices (53.3 percent) during the crisis.
  5. The drop in Irish house prices during the crisis overshot the long-term trend by roughly 31 percent - a steep price to pay for massive excesses of the Celtic Garfield era of 2003-2007.
  6. At the start of 2004, Irish house prices were 50 percent above their long term trend line, which is pretty much bang on with my estimate back in 2004 that I published here: as a warning to Irish policymakers - a warning, as we all know well - that was ignored.
  7. Referencing 2018 data, while the price dynamics so far appear to be catching up with the longer run trend, there is an increasing risk of a new price bubble forming, should price inflation continue unabated. For example, at an average rate of house price inflation of 11.34 percent (2014-2018 average), by the end of 2022, Irish house prices can exceed long-term trend by more than 15 percent.
Of course, a warning is due: this exercise is just one of many way to assess longer term sustainability trends in house price dynamics.  

For example, historical average rate of growth in house prices across 24 countries reported by BIS for 1970-2006 period is 2.34 percent per annum. Were we to take this rate of growth from 1998 through 2018 as the longer term trend indicator, Irish house prices would stand 32.7 percent above the long-run trend levels in 2018, implying that 
  • Irish house prices reached long run equilibrium around 1Q 2015, and
  • At the end of 2018, we were close more than 1/4 of the way toward the next bubble peak, in which case, by the end of 2021 we should be half way there.
Numbers are not simple. But numbers are starting to warrant some concerns. 

22/5/16: House Prices & Household Consumption: From One Bust to the Other

In their often-cited 2013 paper, titled “Household Balance Sheets, Consumption, and the Economic Slump” (The Quarterly Journal of Economics, 128, 1687–1726, 2013), Mian, Rao, and Sufi used geographic variation in changes house prices over the period 2006-2009 and household balance sheets in 2006, to estimate the elasticity of consumption expenditures to changes in the housing share of household net worth. In other words, the authors tried to determine how responsive is consumption to changes in house prices and housing wealth. The study estimated that 1 percent drop in housing share of household net worth was associated with 0.6-0.8 percent decline in total consumer expenditure, including durable and non-durable consumption.

The problem with Mian, Rao and Sufi (2013) estimates is that they were derived from a proprietary data. And their analysis used proxy data for total expenditure.

Still, the paper is extremely influential because it documents a significant channel for shock transmission from property prices to household consumption, and thus aggregate demand. And the estimated elasticities are shockingly large. This correlates strongly with the actual experience in the U.S. during the Great Recession, when the drop in household consumption expenditures was much sharper, significantly broader and much more persistent than in other recessions. As referenced in Kaplan, Mitman and Violante (2016) paper (see full reference below), “… unlike in past recessions, virtually all components of consumption expenditures, not just durables, dropped substantially. The leading explanation for these atypical aggregate consumption dynamics is the simultaneous extraordinary destruction of housing net worth: most aggregate house price indexes show a decline of around 30 percent over this period, and only a partial recovery towards trend since.”

With this realisation, Kaplan, Mitman and Violante (2016) actually retests Mian, Rao and Sufi (2013) results, using this time around publicly available data sources. Specifically, Kaplan, Mitman and Violante (2016) ask the following question: “To what extent is the plunge in housing wealth responsible for the decline in the consumption expenditures of US households during the Great Recession?”

To answer it, they first “verify the robustness of the Mian, Rao and Sufi (2013) findings using different data on both expenditures and housing net worth. For non-durable expenditures, [they] use store-level sales from the Kilts-Nielsen Retail Scanner Dataset (KNRS), a panel dataset of total sales (quantities and prices) at the UPC (barcode) level for around 40,000 geographically dispersed stores in the US. …To construct [a] measure of local housing net worth, [Kaplan, Mitman and Violante (2016)] use house price data from Zillow…”

Kaplan, Mitman and Violante (2016)findings are very reassuring: “When we replicate MRS using our own data sources, we obtain an OLS estimate of 0.24 and an IV estimate of 0.36 for the elasticity of non-durable expenditures to housing net worth shocks. Based on Mastercard data on non-durables alone, MRS report OLS estimates of 0.34-0.38. Using the KNRS expenditure data together with a measure of the change in the housing share of net worth provided by MRS, we obtain an OLS estimate of 0.34 and an IV estimate of 0.37 – essentially the same elasticities that MRS find. …Overall, we find it encouraging that two very different measures of household spending yield such similar elasticity estimates.” The numerical value differences between the two studies are probably due to different sources of house price data, so they are not material to the studies.

Meanwhile, “…the interaction between the fall in local house prices and the size of initial leverage has no statistically significant effect on nondurable expenditures, once the direct effect of the fall in local house prices has been controlled for.”

Beyond this, the study separates “the price and quantity components of the fall in nominal consumption expenditures. …When we control for …changes in prices, we find an elasticity that is 20% smaller than our baseline estimates for nominal expenditures.” In other words, deflation and moderation in inflation did ameliorate overall impact of property prices decline on consumption.

Lastly, the authors use a much more broadly-based data for consumption from the Diary Survey of the Consumer Expenditure Survey “to estimate the elasticity of total nondurable goods and services” to the consumer expenditure survey counterpart of expenditures in the more detailed data set used for original estimates. The authors “obtain an elasticity between 0.7 and 0.9 … when applied to total non-durable goods and services.”

Overall, the shock transmission channel that works from declining house prices and housing wealth to household consumption is not only non-trivial in scale, but is robust to different sources of data being used to estimate this channel. House prices do have significant impact on household demand and, thus, on aggregate demand. And house price busts do lead to economic growth drops.

Full paper: Kaplan, Greg and Mitman, Kurt and Violante, Giovanni L., "Non-Durable Consumption and Housing Net Worth in the Great Recession: Evidence from Easily Accessible Data" (May 2016, NBER Working Paper No. w22232:

8/5/15: Irish Residential Property Prices: Q1 2015

Updating residential property price indices for Ireland for 1Q 2015:

  • National property prices index ended 1Q 2015 at 80.7, up 16.79% y/y - the highest rate of growth in series history (since January 2005), but down on 4Q 2014 reading of 81.4. Latest reading we have puts prices at the level of October 2014. Compared to peak, prices were down 38.2% at the end of 1Q 2015. National property prices were up 25.9% on crisis trough in 1Q 2015.

  • National house prices ended 1Q 2015 at index reading of 83.8, which is down on 84.6 reading at the end of 4Q 2014, but up 16.55% y/y - the highest rate of growth in the series since September 2006. Relative to peak, national house prices were still down 36.5%.At the end of 1Q 2015, house prices nationally were up 25.5% on crisis period trough.
  • National apartments prices index finished 1Q 2015 at 66.4, up on 4Q 2014 reading of 64.2 and 25.5% higher than a year ago. Apartment prices are down 46.4% on their peak and up 45.3% on crisis period trough. Y/y growth rates in apartments prices is now running at the highest level in history of the CSO series (from January 2005).

  • Ex-Dublin, national residential property price index ended 1Q 2015 at 75.3, marking a marginal decline on 4Q 2014 reading of 75.5, but up 10.74% y/y - the highest rate of growth since May 2007. Compared to peak, prices are down 41.5% and they are up 13.9% on crisis period trough.
  • Ex-Dublin house prices finished 1Q 2015 at the index reading of 77.1, which is virtually unchanged on 77.2 reading at the end of 4Q 2014. Year-on-year prices are up 10.78% which is the fastest rate of expansion since May 2007. Compared to peak prices are still 40.6% lower, although they are 14.2% ahead of the crisis period trough.
  • Dublin residential property prices were at 82.5 at the end of 1Q 2015, down on 83.8 index reading at the end of 4Q 2014. Annual rate of growth at the end of 1Q 2015 was 22.77%, the highest since October 2014. Dublin residential property prices are down 38.7% compared to peak and up 44% on crisis period trough. Over the last 24 months, Dublin residential property prices grew cumulatively 40.3%.
  • Dublin house prices index ended 1Q 2015 at a reading of 86.9, which is below 88.8 index reading at the end of 4Q 2014, but up 22.05% y/y, the highest rate of growth in 3 months from December 2014. Dublin house prices are down 36.9% on pre-crisis peak and are up 42.93% on crisis period trough. Over the last 24 months, cumulative growth in Dublin house prices stands at 39.5%.
  • Dublin apartments price index ended 1Q 2015 at a reading of 73.7, up on 70.2 reading attained at the end of 4Q 2014, and up 29.75% y/y - the fastest rate of growth recorded since September 2014. Compared to peak, prices are still down 42.2% and they are up 59.2% on crisis period trough. Over the last 24 month, Dublin apartments prices rose cumulatively by 51.3%.

Longer dated series available below:

And to update the chart on property valuations relative to inflation trend (bubble marker):

As chart above clearly shows, we are getting closer to the point beyond which property prices will no longer be supported by the underlying fundamentals. However, we are not there, yet. Acceleration in inflation and/or deceleration in property prices growth will delay this point significantly. One way or the other, there is still a sizeable gap between where the prices are today and where they should be in the long run that remains to be closed.