Importance of housing market for key economic decisions highlighted

There is a huge direct bearing between house prices and Ireland’s real economy compared with other countries, a report by the Economic and Social Research Institute says.

And, there has been a drive towards deleveraging since the housing market collapsed in 2008. Most of this deleveraging has taken place among more affluent households. Consequently, when the economy starts to recover and wage levels rise, this will put a drag on consumer spending authors Kieran McQuinn and Yvonne McCarthy found.

“Across countries, empirical estimates testify to the importance of the housing market to wider economic activity; however, this relationship is likely to be particularly strong in an Irish context.

“Drawing on recentre search conducted at a micro-economic level, we highlight the importance of the housing market for key economic decisions such as consumption and deleveraging.

“Our results suggest that mortgaged Irish households exhibit a relatively large wealth effect out of housing when compared with other countries.”

For well over a decade leading up to the mid 1990s, Ireland was mired in a deep recession. But with the increase in economic activity, there was a corresponding increase in housing market activity.

Ireland’s entry to the single currency heralded a period of loose monetary policy. Banks could also access cheap funding on international wholesale money markets.

“While a relatively large and significant wealth effect suggests that developments in the housing market can have an influential role in overall Irish economic activity, it is clear, particularly, for those households in negative equity, that house price increases have to be perceived as being permanent in nature for the wealth effect to be realised,” the report states.