Modelling the demand and supply sides of the housing market: evidence fromIreland

This paper uses cointegration analysis in order to separately identify both the demand and supply sides of the Irish housing market. The analysis sugg ests that in the long-run the demand side of the market can be modelled usi ng a stable relationship between house prices, the housing stock, income an d mortgage interest rates. To model the supply side of the market, the empi rical section of the paper tests the data for the existence of a stable rat io of house prices to construction costs (including land costs) which is co nsistent with 'normal profits' in the house building sector. Impulse respon se 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 constrai nts 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 h ousing demand. (C) 1999 Elsevier Science B.V. All rights reserved.