Welcome to Research Insights, where we put the focus on the Department of Economics' research output, events and conferences.
Each month, we sit down with a member of our department to learn more about a published paper, or a recent event or conference they have attended.
This month, we spoke to Ronan C. Lyons, Associate Professor in Economics and Director of TRiSS, about his paper in Real Estate Economics, co-written with Maximilian Günnewig-Mönert.
"Housing prices, costs, and policy: The housing supply equation in Ireland since 1970"
Professor Ronan Lyons & Maximilian Günnewig-Mönert
Real Estate Economics | May 2024
Abstract: This article examines the responsiveness of new housing supply to prices and costs, using the case of Ireland at quarterly frequency from the 1970s, as well as a county-level panel from the 1990s. Across four error-correction specifications, and supported by an instrumental variables approach, we find the estimated elasticity of new housing supply to prices of +0.9 in the baseline, while that of costs is larger in magnitude (−1.9). We present evidence that responsiveness to prices rose after the 1980s, then fell in the 2000s, before rising again and also that elasticities vary at the county level.
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Professor Ronan Lyons
Professor Ronan Lyons is an Associate Professor in Economics at Trinity College Dublin. His research focuses on housing markets, urban economics and economic history. He is Director of Trinity Research in Social Sciences and Associate Director and Data Lead at the Centre for Economics, Politics and History.
Maximilian Günnewig-Mönert
Maximilian's research interests include urban economics, economic history and public economics. He completed his PhD in Economics in Trinity College Dublin in 2024 under the supervision of Professor Ronan Lyons.
Can you explain what this paper is about for anyone unfamiliar with the abstract?
In our article, we explore what influences new housing supply in Ireland – focusing in particular on how changes in housing prices and construction costs affect supply over time. We use data for Ireland from the 1970s to 2022 and find a strong link between new housing supply and both prices and costs: as prices rise, supply increases, and as costs rise, supply decreases. This is true using different measures of supply (permits, construction starts, investments, and completions) and also using data for the country, for Dublin or at the county level. Further, we find that the responsiveness of supply to prices changed over time, increasing in the 1980s, then falling back, before increasing again in the 2010s.
Why did you decide to write this paper?
While it had been on my mind, as a question of fundamental importance in understanding the health of the Irish housing system, it was actually the Central Bank asking me to look at the question, which sparked the real work on the paper. In particular, they were keen to understand if there was any link between their mortgage market measures, introduced in 2015, and the responsiveness of housing supply. In the end, we found no link between the mortgage market measures and how responsive supply is – other than the link captured in the paper.
How do you see this research making a difference in the real world?
It is very useful for policymakers to see confirmed the basics of theory – that as prices rise or costs fall, housing supply will increase. Our research means that the low level of new housing supply in Ireland during the 2010s was not anomalous – it was well by the fundamentals, in particular the dramatic rise in (after-tax) construction costs. While housing prices in 2020 were roughly 20% below their 2007 level, building costs after tax reliefs were between 70% and 90% higher in 2020 than 2007. Further, our findings show that the responsiveness of supply is more than twice as large for falls in costs as it is for increases in prices. If housing supply in Ireland were to increase by 50%, our analysis suggests that an increase in prices of 57% or a fall in costs of 19% would be needed. Assuming housing affordability is a key goal for policymakers, this means that Ireland’s housing deficit will be solved by greater cost efficiency.
October 2024