A SVAR Approach to the Irish Housing Market: Evidence from the Pre- and Post-EMU Periods

Abstract

This paper employs a structural VAR model to investigate the driving forces behind house price inflations in Ireland. Past studies suggest that income levels, interest rates and bank credit are possible determinants of Irish house prices. However, there is a lack of literature that examines the effect of foreign factors and the impact of Ireland's membership in the EMU. Hence, I divide the period under study into two main phases — the pre- and the post-1999 periods — to study the impact of joining the EMU on Irish property prices. This paper produces two key results. First, Irish house prices were mainly driven by domestic variables before 1999, but became much more vulnerable to foreign inflationary and output shocks after Ireland adopted the euro. Second, credit did not generate an exogenous shock to Irish property prices during either period. Instead, it acted as a significant intermediary in the propagation mechanism that transmitted foreign shocks to the Irish housing market during the post-1999 period. Therefore, I believe that by focusing on fiscal policies and credit channels, Ireland will be in a better position to protect its domestic housing market from the effects of foreign shocks should a housing boom develop again in the future.