The Impact of Macroeconomic Factors on Irish Residential Property Price

The purpose of this paper is to establish a linear model of the macroeconomic influencing factors of residential property prices in Ireland in recent years, select 6 macroeconomic indicators as the initial import independent variable of the equation, and carry out a preliminary multivariate linear regression analysis with the residential property price to solve the problem of multiple collinearity between the independent variables. Then select two independent variables and the residential property price to establish a multivariate linear regression equation and analyze the regression results. In addition, use the actual data to test the established equation and draw the conclusion that the equation has a positive effect, thus, it will point out the application value of the equation.

Background and Rationale

In recent years, Ireland's real estate market has been very prosperous, and attracting a lot of capital inflows in Irish market, so that the residential property prices have appeared dramatically rapid growth. Thus, it has affecting the healthy development of the national economy. In addition, this also restrict the improvement of the quality of life of residents. Therefore, the phenomenon of overheating in the residential property market has attracted extensive attention in Ireland. In theory, the residential property price is influenced by construction cost, macro-economic factor, social factor, population factor, policy system, supply and demand change, and etc. However, this paper will focus on explore the impact of macroeconomic factors on Irish residential property prices due to it normally play the crucial role in development of property prices.

“Ireland’s housing market has been highly cyclical” (Lalaine, 2020). From 1996 to 2006, the Irish home price had a massive boom, the average of residential property price has increased to 383%, and new house prices up to 284%. However, when there was a bubble burst in 2008, the Ireland’s residential property price fell by an average of 53%. From 2013, the Ireland’s residential property market started to recover, the house price rising by 6.4%. Under this situation, the increasing of residential property price is becoming an Irish society's hot spots. If the house prices without effective control, this may affect the housing conditions of urban families, financial security, and macroeconomic health. Therefore, the study of the impact of macroeconomic factors on residential property prices cannot only provide the basis for the Irish government macro-control, but also provide a reference for the operation of real estate development enterprise projects and bank credit management.

Literature Review

The history of the development of the real estate market in most countries is long, the market mechanism is perfect, and the research on the real estate market is relatively comprehensive. In terms of the influencing factors of real estate price, most of the scholars are not only emphasize the effect of government factors but also pay attention to the influence of market mechanism on real estate price. It has been pointed out that there is relationship between property prices, income and interest rates in Sweden, the changes in the level of income will leading the changes in property price, however the property price has less effect on the income levels. In United Kingdom, the income levels and property price are the interrelationship of cause and effect (Bharat and Zan, 2003).

According to an analysis by Kostas and Haibin (2004), using real estate price, inflation on Consumer Price Index, growth rate of Gross Domestic Product (GDP) and interest rate in short term to established the model, the results of study shows that inflation is the main influence factor of real estate price, and the influence of income on real estate price can be neglected.  Bojan and Darja (2016) are using multiple linear regression moodle, and focused on macroeconomic factors, “which are unemployment rate, the current account of the country stock index, gross domestic product and industrial production are significantly associated with property price in relation to the different cultural environments: Slovenia, Greece, France, Poland and Norway.” The result is that there are statistically significant correlations between the prices of residential real estate and selected macroeconomic factors.

Nellis and Longbottoml (1981) has tried to explain the determinants of British residential property prices by analyzing UK data. The authors define that the demand of housing as a real function of population size, asset stock of mortgage loans in the community, average commodity housing price, personal income, consumer goods price, and mortgage rate. Puts supply as the define a function of housing price and housing stock. According to the principle of equal supply and demand, it obtained that a simplified formula regarding price of average commodity housing. Thus, it can be derived the price of residence. The conclusion of econometrics shows that income is the most important factor affecting residential property prices, the rest of main factors are mortgage interest rates and the stock of funds in the community for mortgage loans.

Xuefeng Nie (2005) were analysis of the effects and delays of China's monetary policy effects on the real estate market by using Multiple Linear Correlation Model. The results show that monetary policy can affect the price of real estate price, the ratio of the impact of money supply on the real estate market is more significant, and the impact of monetary policy on the real estate market is delayed for 2 quarters.

Jie (2005) point that property taxes can reduce house prices, restrain investment demand and squeeze the bubble economy. Different from the above point of view, Shumin (2007) argued that the reform of the real estate tax system has a certain effect on reducing the excessively high house price, but whether it can become a reality depends on the influence of land supply system, real estate demand, material price, financial policy and etc. Yao (2015) concluded that the property tax had little impact on house prices.

Research Gap

From the above literature review shows that the macroeconomic factors affecting the real estate price are very complicated, and different scholars have differences in choosing the influencing factors of the real estate market. Most of scholars were only analyze their influence on the real estate price from a certain angle or focused on some of variables.

However, there are not much research to analysis the relationship between growth rate of income, growth rate of GDP, inflation rate, national house construction cost index and residential property price index.

Therefore, this paper will study how each of the macroeconomic factors changes in percentage to effects on Irish residential property price. The period will be from 2005 to 2017, so that it can include the factor of inflation in 2008.

Research Method

This paper will draw lessons from the others’results of literature, adopt the same method of measurement and analysis, combined with the actual situation of the Irish residential property market, to finalize the main macroeconomic factors.

The main research methods are including:

1. Survey and analysis, by use of Central Statistics Office (CSO) data to collect the relevant of macroeconomic factor in Irish residential property market.

1. Data research. Study the obtained relevant recourses and data, and then analysis them.

1. Empirical research. By using the basic theory and method of quantitative analysis, through the analysis of the historical data of the residential property market in Ireland to establish a measurement model (i.e. linear correlation model) that can accurately express its relationship, and then analyze the influencing macroeconomic factors of residential property prices in Ireland.

Data source

This paper will get Ireland GDP data from World Bank.

Ireland - GDP Growth Rate

National House Construction Cost Index

(Source: Department of Housing, Planning and Local Government)

Research Difficulties 

Firstly, most of Ireland’s property market data is scattered data, thus, this study will try to use more recent data to analyze, so that it will have a better reflect of current situation in the Irish market.

Secondly, at present, all of the understand are only from the existing literature analysis, so that the more special and systematic study of the influence factors of Irish property price and the comprehensive evaluation of property price need to be read. In addition, the relevant discussion is also limited to qualitative analysis, there are less articles based on the quantitative point of view of the analysis. Therefore, aim to become a meaningful study are not only to study the actual situation of the Irish residential property market to analyze but also use both qualitative and quantitative to analysis each macroeconomic factor.

Research Objective

This paper is basis of extensive review to relevant literature, summarizes the existing theory of influencing factors of real estate price, by combined with the actual situation of residential property development in Ireland, and adopts both qualitative and quantitative analysis methods to theoretically analyze the relevant macroeconomic factors that affect the residential property price in Ireland. Finally, in conclusion, it will give suggestions through interviews with some people and also finalize the main macroeconomic factors.

Therefore, this paper could be providing the Irish government with the basis reference for microscopical control, also it can provide consumer as support material. In addition, this could provide a reference for the operation of property development enterprise projects and bank credit management.

Timetable

• April 1rd-April 7th: An extensive literature review, especially on linear correlation model.
• April 8th-April 17th: Narrow down sources and draft the literature review.
• April 18th-April 26th: Prepare for exams.
• May 10th- May 17th: Data collection; review results and complete analysis.
• May 11th-May 30th: Draft the parts of “Methodology, Analysis and Findings and Discussion and Conclusion”.
• July 1st-July 10th: Finish the first draft.
• August 27th: Submit the dissertation.

Bibliography

• Bharat, B. and Zan, Y. (2003) House Prices and Housing Investment in Sweden and the UK: Econometric Analysis for the Period 1970–1998. Review of Urban & regional development studies, 2003 (10): pp189-216.
• Bojan, G. and Darja, K. G. (2016) Influence of Macroeconomic Factors on Prices of Real Estate in Various Cultural Environments: Case of Slovenia, Greece, France, Poland and Norway. Science Direct [Online] Available at: https://www.sciencedirect.com/science/article/pii/S2212567116303045 [Accessed 25 January 2020].
• Delmendo, L. (2020). Ireland’s housing market has lost steam. [online] Globalpropertyguide.com. Available at: https://www.globalpropertyguide.com/Europe/Ireland/Price-History [Accessed 25 Jan. 2020].
• Jie, T (2006) The impact of a property tax on house prices. CNKI [Online] Available at: http://cn.oversea.cnki.net/KCMS/detail/detail.aspx?filename=JSYS200601041&dbcode=CJFD&dbname=cjfd2006 [Accessed 26 January 2020].
• Kostas, T. and Haibin, Z. (2004). What drives housing price dynamics: cross-country evidence, BIS Quarterly Review [Online] Available at: https://www.bis.org/publ/qtrpdf/r_qt0403f.pdf [Accessed 26 January 2020].
• Nellis, J. and Longbottom, J. (1981) An empirical analysis of the determination of house prices in the united Kingdom. Urban Studies, 1981 (181): 9-21.
• Shumin, Y (2007) Real Estate Market Regulation Policy and Real Estate Taxation in China. CNKI [Online] Available at: http://kns.cnki.net/kcms/detail/detail.aspx?filename=SWSW201007007&dbcode=CJFQ&dbname=CJFD2010&v= [Accessed 26 January 2020].
• Xuefeng, N. (2005) An analysis of the impact of China's monetary policy on the real estate market. CNKI [Online]: http://www.cnki.com.cn/Article/CJFDTotal-HNJG200504016.htm [Accessed 25 Jan. 2020].
• Yao, C. (2015) The influence of property tax on house price. Lunwen [Online] Available at: https://www.001lunwen.com/jingjixue/53370.html [Accessed 26 January 2020].