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Topic 4:House Prices

Topic 4:House Prices. Reading 1: “Monetary Policy and House Prices: A Cross-Country Study” by Alan Ahearne, et al. IFDP 841.  Federal Reserve Board (September 2005)  Section 1 (Introduction) Section 2 (Features of house prices) Section 3 (House prices and real economic activity)

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Topic 4:House Prices

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  1. Topic 4:House Prices • Reading 1: “Monetary Policy and House Prices: A Cross-Country Study” by Alan Ahearne, et al. IFDP 841.  Federal Reserve Board (September 2005)  • Section 1 (Introduction) • Section 2 (Features of house prices) • Section 3 (House prices and real economic activity) • Section 6 (Conclusion)

  2. Reading • Reading 2: "We are on our own if the bubble bursts" by Alan Ahearne. The Sunday Business Post, 9th October 2005

  3. Features of House Prices in Industrial Countries • Prolonged rises and fall in real house prices over past 35 years • Rapidly rising house prices in most countries for the past several years • Japan and Germany notable exceptions • Upward trends in several countries • Population growth and fixed supply of land • Different productivity across sectors

  4. Peaks • At the “peak,” level of house prices higher than at any point 3 years on either side • Changes in house prices correlated across countries  global factors important • Low interest rates • Global business cycles

  5. International co-movement of real house prices • Chart 2.2 • Number of countries experiencing rapid growth and rapid declines • 4 major episodes of rapid price increases • 173-74, 78-79, 86-89, and recently • Each past episodes of rapid price increases followed by episode of rapid declines

  6. Measures of valuation • Ratio of house prices to disposable income • Trends complicate measure, but near record highs on United Kingdom and Australia stand out • Ratio of house prices to rents • Similar to price-to-earnings ratio

  7. Rents • Falling rents may reflect: • Correction after temporary surge • Expectations of future capital gains • Excess supply of rental properties • Up to one-third of Irish housing output is satisfying demand for second homes

  8. Price-rent ratio • Rising price-rent ratio can be justified by declining “carrying costs” • Lower carrying costs as a result of: • Falling interest rates • Changes in taxation

  9. Price-rent ratio • Price-rent ratio significantly above trend tend to move back toward historical norms • Prices usually adjust more than rents • Price-rent ratio does not capture “structural” shifts

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