A Multiple Error-Correction Model of Housing Supply

Abstract

This paper considers supply dynamics in the context of the Irish residential market. The analysis, in a multiple error-correction framework, reveals that although developers did respond to disequilibrium in supply, the rate of adjustment was relatively slow. In contrast, however, disequilibrium in demand did not impact upon supply, suggesting that inelastic supply conditions could explain the prolonged nature of the boom in the Irish market. Increased elasticity in the later stages of the boom may have been a contributory factor in the extent of the house price falls observed in recent years.

Keywords::

• Housing supply
• demand dynamics
• Irish market

Acknowledgements

The valuable comments of the Managing Editor and two anonymous referees are much appreciated. The authors would also like to thank the participants at the Asian Real Estate Society Annual Conference where an early draft of this paper was presented.

Notes

¹ For a broad analysis of some of the key elements of the recent cycle in an international context, see papers such as Duca et al. (2010) and Ellis (2011).

² See also the recent paper by Grimes and Aitken (2010). In addition, Glaeser and Gyourko (2006) note that although demand factors still drive mean reverting behaviour in housing markets, the importance of supply side factors is increased in the case of markets with more elastic supply.

³ In the context of sub-market behaviour, Bramley and Leishman (2005) and Bramley et al. (2008) consider the issue of disequilibrium, factoring into the analysis the links between supply and house price dynamics.

⁴ Levin and Pryce (2009) also consider the impact of constraints upon the inelastic nature of supply during the boom.

⁵ Meen and Nygaard (2011) argue that regional differences in the supply elasticities can also be associated with variation in historical land use.

⁶ See also Blackely (1999) for a time series analysis of elasticity. In addition, Malpezzi and MacLennan (2001) find that elasticity is greater in the USA than in the UK. Furthermore, and although elasticity marginally increased in the US post-1945, it has reduced (become more inelastic) in the UK. Muellbauer and Murphy (2008) argue that greater inelasticity in the UK contributed, together with other factors, to the enhanced cyclical behaviour observed in the UK during the cycle of the late 1980s–early 1990s.

⁷ See Berry et al. (2001) for a consideration of the short-term impact on the Irish housing market from the first Bacon report.

⁸ In a broader context, Green et al. (2005) note potential issues with labour demand. They note that increased demand can lead to both labour and material shortages that can lead to subsequent upward pressure on prices. Pryce (1999) also considers the impact of labour constraints.