Modelling the demand and supply sides of the housing market: evidence from Ireland

This paper uses cointegration analysis in order to separately identify both the demand and supply sides of the Irish housing market. The analysis suggests that in the long-run the demand side of the market can be modelled using a stable relationship between house prices, the housing stock, income and mortgage interest rates. To model the supply side of the market, the empirical section of the paper tests the data for the existence of a stable ratio of house prices to construction costs (including land costs) which is consistent with 'normal profits' in the house building sector. Impulse response functions are employed in order to shed light on the issue of short-term dynamics about the identified cointegrating relationships. Interestingly, the dynamics implied by the VECM specification suggest significant constraints on the supply side of the market and the potential for house prices to overshoot their long-run equilibrium level following a sudden increase in housing demand. (C) 1999 Elsevier Science B.V. All rights reserved.