Tuesday 22 August 2017

House price inflation is not proof of a recovering economy

House prices outside capital rise for first time since 2008
House prices outside capital rise for first time since 2008

The great social scientist Ed Leamer coined the term "housing 'is' the business cycle". Home ownership, home building and home 'flipping' characterised the 2002 to 2007 period. Now Dublin house prices and rental prices are rising while the rest of the country remains largely static.

When the value of your equity rises, you feel wealthier, even though you aren't unless you sell the home. When you feel wealthier, you are more likely to consume more, borrow more and report feeling better about the world. This is known, cleverly, as the wealth effect.

Research by the Central Bank's Yvonne McCarthy and Kieran McQuinn in 2013 found that house price expectations were of major importance in influencing wealth effects.

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