What house price equation do households use? Evidence from Ireland,

Transcription

1 What house price equation do households use? Evidence from Ireland, Ronan Lyons Trinity College Dublin & Spatial Economics Research Centre (LSE) Irish Economics and Psychology Conference Geary Institute, October 2014

2 Outline Motivation Background & Theory Data Sources Preliminary Findings Conclusions

3 Who am I? What am I doing here? Two areas of research focus currently 1. Long-run housing markets Housing prices, rents, credit conditions [Dublin ] Measuring regulatory/planning conditions [supply function] Tenure choice 2. Sustainable & behavioural real estate Nature of demand for location- and dwelling-specific attributes (e.g. proximity to schools, rail; energy efficiency) Expectations in relation to future housing prices

4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Motivation Background & Theory Data Sources Preliminary Findings Conclusions Why Irish house price expectations? Why hp expectations? Interest in price expectations generally (e.g. ECB) Housing as the dominant household good and asset Two sets of factors driving LR house prices Fundamentals (slow, affect rents): Y, S, demographics Asset factors (fast, affect p/r ratio): credit conditions, user cost/expectations 30% 20% 10% 0% -10% -20% -30% Why Ireland? Annual change in house prices, Ireland Dublin Source: ESRI, CSO, Daft.ie

5 Irish house price drivers, Role of Expectations Source: Lyons & Muellbauer (2015?)

6 Outline Motivation Background & Theory Data Sources Preliminary Findings Conclusions

7 Households underlying HP equation Previous graph based on LR equation: RHP = K (Y/S) 0.4 PHHR MCDR 1.5 UC User cost, UC, depends on mortgage interest rate [3%,6%] and expectations [-30%,30%] Modeled above as purely adaptive (4-year average nominal) Likely that there are both adaptive and rational components to expectations Core question of this research: What house price equation do households in dealing with the housing market? E.g. if income increases or credit conditions improve, what is the expected impact on house prices?

8 Two parts of the question Interested in both alpha and the beta-vector: dhp e t = α(dhp t-1 )+(1-α)[βΔX t ] First part (alpha): To what extent are house price expectations rational versus adaptive? In a horse race between past and future changes, which explains more of current expectations? Second part (beta): Of the bit that is rational /non-adaptive, what is the perceived relationship between house prices and fundamentals, asset factors?

9 Outline Motivation Background & Theory Data Sources Preliminary Findings Conclusions

10 A first look at the data Source: PTSB,CSO & survey data

11 Survey micro-data, ESRI-IIB annual supplement to monthly Consumer Sentiment survey, N = 1000 (target); over-the-phone, typically in February Unfortunately, questions changed each year Core questions: 1-year house price expectation, demographics [age, marital, employment, educ], housing mkt status [ex 2008] Daft.ie Sentiment Survey, [online] Annual (December, target N = 2000) Quarterly 2014q1-present (target N= 1000) Original questions mapped to ESRI-IIB; include demographics housing market status, 1/5 year expectations (local, national)

12 Pilot experimental survey, methods from experimental economics WTP literature Choice experiment ( which is preferred/more plausible? ) Contingent valuation (double-bounded Y/N questions) Direct estimation ( how much for X? ) Pilot survey deployed in June 2014, following focus groups N = 29, with a typical response time ~25 minutes List of ~100 Daft.ie respondents who opted in ~45 opened the survey, of which 2/3s completed it Survey features Extensive randomization within survey, e.g. between and within CE and CV components Eight choice experiment scenarios

13 Non-experimental questions About them Age, gender, education, marital status Employment status and sector Household size, income and location Housing market tenure & history Intentions regarding purchasing Their attitude to the housing market Overall 1- and 5-year expectations for Dublin/Ireland Assign 17 factors to three groups (upward, downward, no pressure on prices) and rank within first two

14 Experimental methods

15 Outline Motivation Background & Theory Data Sources Preliminary Findings Conclusions

16 Evidence from national house prices

17 Evidence from local house prices

18 Evidence from direct estimation

19 Evidence from contingent valuation

20 Evidence from contingent valuation Most challenging part for focus groups Reflects complexity of real world? Preliminary regressions suggest that results are between orthogonal and inverse to other methods! Income, supply (-) Deposit, MRI (0)

21 Evidence from text-boxes Cash buyers, amenities: The mini-boom created by Cash buyers over the last 12 months will begin to fizzle out and we will see a return to a higher % of house purchases financed by credit. Mortgage interest rates will be interesting to watch as the disconnect between ECB rates and the actual mortgage rates starts to increase Dublin lack of supply pushing up prices for homes connected to public transport links. As the 'choice' properties are out of reach for most buyers, those with means will try to base themselves on good transport links to work in the capital. Role of supply: House prices will continue to rise nation wide. But there will still be a shortage of houses in Dublin. Prices will rise steeply in Dublin and slower elsewhere until supply begins to come onstream. There will be a bubble for a few years until supply reaches demand. This will level off as new property becomes available.

22 More evidence from text-boxes Relationship with rents: The Irish housing sales market is completely irrational and has been for quite some time. It has knock on impact on the rental market also. In the next five years, I do not see current sales gains being retained, even in Dublin, not without substantial general wage inflation... So I expect it in general to trend down but in a highly erratic manner. Arrears: Initial increases in the next 12 months, followed by a levelling off (and slight decline) as supply increases. I expect the supply to come from people selling houses as a result of bank deals etc, rather than any increase in housing stock. Expectations: Panic in the greater Dublin area, then things will even out until new houses are built. Not sure how the smaller counties will fare.

23 Feedback on the survey itself Too long. Survey is good. I thought the alternative questions were too vague, I would prefer using scenarios, such as a working couple with/without kids, annual income and so on. Hi, as regards the alternative scenarios, I was not sure if they were meant to apply immediately or at some unspecified date in the future, so it was difficult to reason this part out. If it was a current scenario, then I think this should be called out as such.

24 Outline Motivation Background & Theory Data Sources Preliminary Findings Conclusions

25 What we know so far Horse-racing: past expectations loom large in current house price expectations Heterogeneity: individual factors [gamma] important dhp e it = α i (dhp t-1 )+(1-α i )[β i ΔX t ]+ΓY it Full housing market history needed to explain within-period variation across individuals Inflection: turning points (especially where this is local variation) are likely to be central to identification Complexity: using experimental methods, balance reflecting complexity (CE) and not confusing respondent (CV/DE) Survey responses show depth of thought need appropriate means of drawing that out

26 Lessons learned Survey to be deployed online in December 2014 Target sample size: 1,000 (daft.ie and adverts.ie users) CE needs to be overhauled Findings inconsistent with all other responses Specifically ask which outcome is more plausible for 2020 need core set of scenarios (from high to low growth) DE implies CV method needs to be somewhat looser Anchoring bias re supply! Greater range of potential outcomes sign-agnostic What would Occam do? DE for fundamentals, as well as for house prices

27 Other tweaks Few demographic attributes seem to matter much Housing market status the major exception: retain thorough questions on housing market history What role for factors outside the four chosen (Y, S, D, r)? Inclusion of i s expectations dhp e -bar and general inflation SR and sunspot factors (arrears, negative equity, cash buyers) Other points Lag structure in estimating alpha Exploit county-specific variation

28 Thank you! Thank you for your time today Looking forward to comments and discussion Contact details: