Topic 4 House Prices n Reading 1 Monetary

Topic 4: House Prices n 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)

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

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

Peaks n n 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 n Global business cycles n

International co-movement of real house prices n n n Chart 2. 2 Number of countries experiencing rapid growth and rapid declines 4 major episodes of rapid price increases n n 173 -74, 78 -79, 86 -89, and recently Each past episodes of rapid price increases followed by episode of rapid declines

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

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

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

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