User Cost and Irish House Prices

30/11/2011

User Cost and Irish House Prices

This article examines the role that expected changes in house prices might play in the demand for housing using the concept of the user cost of housing. User cost is a notional price paid by homeowners to live in their home for a year, in other words it is an estimate of the annual cost of owning a house. The user cost measure takes account of taxation, depreciation, mortgage costs, as well as any benefit/loss arising from capital gain/loss. The article examines the impact on the user cost-to-rent ratio of a number of alternative house price scenarios.

• One of the most important components of user cost is house price expectations. Although very important, house price expectations are difficult to measure;
• The expectation that house prices would continue to grow, delivering strong capital gains, made homeownership attractive at a time when house price levels were high;
• The expectation that house prices will continue to fall has reduced housing demand through the impact of an expected capital loss from homeownership;
• A number of alternative house price scenarios show that house price expectations will play a key role in the demand for housing. A sudden change in expectations can lead to a sharp adjustment in the user cost-to-rent ratio and change the relative attractiveness of homeownership.

Note to Editors: 1. " User Cost and Irish House Prices", a Special Article in the Quarterly Economic Commentary (QEC), Autumn 2011, by David Duffy (ESRI), will be published online on the ESRI website at 00:01 a.m. Wednesday 30th November 2011. 2. The embargo is until 00:01 a.m. Wednesday 30th November 2011. 

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