1. Topic 4:House Prices Reading 1: “Monetary Policy and House Prices: A Cross-Country Study” by Alan Ahearne, et al. IFDP 841. Federal Reserve Board (September 2005) Reading 1: “Monetary Policy and House Prices: A Cross-Country Study” by Alan Ahearne, et al. IFDP 841. Federal Reserve Board (September 2005) Section 1 (Introduction) Section 1 (Introduction) Section 2 (Features of house prices) Section 2 (Features of house prices) Section 3 (House prices and real economic activity) Section 3 (House prices and real economic activity) Section 6 (Conclusion) Section 6 (Conclusion)

2. Reading Reading 2: "We are on our own if the bubble bursts" by Alan Ahearne. The Sunday Business Post, 9th October 2005 Reading 2: "We are on our own if the bubble bursts" by Alan Ahearne. The Sunday Business Post, 9th October 2005

3. Features of House Prices in Industrial Countries Prolonged rises and fall in real house prices over past 35 years Prolonged rises and fall in real house prices over past 35 years Rapidly rising house prices in most countries for the past several years Rapidly rising house prices in most countries for the past several years Japan and Germany notable exceptions Japan and Germany notable exceptions Upward trends in several countries Upward trends in several countries Population growth and fixed supply of land Population growth and fixed supply of land Different productivity across sectors Different productivity across sectors

4. Peaks At the “peak,” level of house prices higher than at any point 3 years on either side At the “peak,” level of house prices higher than at any point 3 years on either side Changes in house prices correlated across countries  global factors important Changes in house prices correlated across countries  global factors important Low interest rates Low interest rates Global business cycles Global business cycles

5. International co-movement of real house prices Chart 2.2 Chart 2.2 Number of countries experiencing rapid growth and rapid declines Number of countries experiencing rapid growth and rapid declines 4 major episodes of rapid price increases 4 major episodes of rapid price increases 173-74, 78-79, 86-89, and recently 173-74, 78-79, 86-89, and recently Each past episodes of rapid price increases followed by episode of rapid declines Each past episodes of rapid price increases followed by episode of rapid declines

6. Measures of valuation Ratio of house prices to disposable income Ratio of house prices to disposable income Trends complicate measure, but near record highs on United Kingdom and Australia stand out Trends complicate measure, but near record highs on United Kingdom and Australia stand out Ratio of house prices to rents Ratio of house prices to rents Similar to price-to-earnings ratio Similar to price-to-earnings ratio

8. Rents Falling rents may reflect: Falling rents may reflect: Correction after temporary surge Correction after temporary surge Expectations of future capital gains Expectations of future capital gains Excess supply of rental properties Excess supply of rental properties Up to one-third of Irish housing output is satisfying demand for second homes Up to one-third of Irish housing output is satisfying demand for second homes

10. Price-rent ratio Rising price-rent ratio can be justified by declining “carrying costs” Rising price-rent ratio can be justified by declining “carrying costs” Lower carrying costs as a result of: Lower carrying costs as a result of: Falling interest rates Falling interest rates Changes in taxation Changes in taxation

11. Price-rent ratio Price-rent ratio significantly above trend tend to move back toward historical norms Price-rent ratio significantly above trend tend to move back toward historical norms Prices usually adjust more than rents Prices usually adjust more than rents Price-rent ratio does not capture “structural” shifts Price-rent ratio does not capture “structural” shifts