New ESRI Research Examines the Link Between the Irish Housing Market and the Real Economy

• Findings suggest impact of changes in housing wealth on consumption is large in Ireland when compared with other countries
• Deleveraging (i.e. reduction in household debt levels) is more likely to occur amongst households who can afford to do so, while reducing debt levels is found to have a negative impact on household consumption.

A new ESRI Research paper,  Consumption and the Housing Market: An Irish Perspective,  examines the relationship between the Irish housing market and the real economy. In the paper, the authors Kieran McQuinn (ESRI) and Yvonne McCarthy (Central Bank) set out to achieve a greater understanding of the linkages between housing, the real economy and financial sector developments. Consumption and the Housing Market analyses two unique micro datasets about Irish households with mortgages to estimate the impact changes in housing wealth are having on consumption, and also the implications of household indebtedness on consumption. “Both issues are central to achieving a greater understanding of developments in the Irish housing market and the real economy” said report author Kieran McQuinn. The results of the research suggest that:

• • The impact of changes in housing wealth on consumption is relatively large in the Irish market when compared with other countries. Thus, large variations in house prices such as those experienced in the Irish market are likely to have a significant impact on the real economy.
  • The decision to reduce household debt levels is found to have negative implications for consumption.
  • Furthermore, in examining household deleveraging patterns, the analysis suggests that it is a relatively affluent cohort of the mortgaged population who are more likely to engage in deleveraging (i.e. reducing their debt levels). This suggests that certain less well-off sections of the mortgaged population are likely to remain significantly indebted while they are unable to address their leveraged position.

Kieran McQuinn continued “The recent financial crisis has highlighted the relationship between the Irish housing market, real economic activity and key fiscal variables. Micro-level information provides rich insights into the nature of these relationships, particularly in light of the financial crisis.”

Notes for editors:   1. Consumption and the Housing Market: An Irish Perspective was authored by Yvonne McCarthy (Central Bank) and Kieran McQuinn (ESRI). 2. The paper will be presented to the 'ESRI Budget Perspectives Conference 2015' on Wednesday 11 June 2014.