BUDGET PERSPECTIVES 2015, PAPER 1. Consumption and the Housing Market: An Irish Perspective. June 2014

McCarthy, Yvonne and McQuinn, Kieran (2014) BUDGET PERSPECTIVES 2015, PAPER 1. Consumption and the Housing Market: An Irish Perspective. June 2014. [Policy Paper]

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Abstract

The recent financial crisis highlighted the strong linkages between the Irish housing market, real economic activity and key fiscal considerations. Over the period 1995 to 2007, while house prices were increasing rapidly on a persistent basis, key economic aggregates such as consumption and income registered strong growth. In the period since then, the decline in the fortunes of the housing sector have also been mirrored in economy-wide developments. 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. In this paper, drawing on recent research 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. Furthermore, in examining the implications of the significant increase in Irish household debt levels, our analysis also suggests that those households which can deleverage do so, and that the decision to reduce debt levels has negative implications for household consumption.

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