Characterising the Financial Cycle in Ireland


NTMA study from April 2019

Biggest thing I took from it was Mortgage volume leads house prices by at least a year

Mortgage lending leads house prices

Drehmann (2012) finds that credit displays the longest medium-term cycle. Credit cycles can be divided into credit to households and credit to non-financial corporates (NFCs). Mortgages tend to account for the majority of credit to households. The total nominal value of credit equals price by volume. For mortgages, that means that it is a combination of house prices and the number of mortgages issued. There exists a useful Irish long-run series for mortgage volumes which dates back to 1970. Figure 5 shows the relationship between mortgage volumes and house prices. Mortgage volume seems to lead house prices (by at least one year), which implies that the influence of credit institutions in kick-starting or curbing the cycle (or non-bank providers of loans) is significant. This pattern is also apparent in the raw data, particularly since the 1980s.

Again, the amplitude of both series has increased markedly since the mid-1990s. Prior to this the first definite cycle was in the 1970s. Mortgage lending accelerated in 1970, peaking five years later. Credit for house purchases turned more than five years before the peak in house prices. This may suggest a role for the fiscal laxity of the late-1970s in prolonging the financial cycle, even though underlying demand for houses was waning. It is claimed, for example, that there was a coincident price bubble in land (including agricultural) in the 1970s (Murphy (1995); Roche and McQuinn (2000)).

Figure 5 also hints that this financial cycle is more advanced than other variables would suggest. In other words, if we characterised the Irish cycle simply with house prices and mortgage volumes there has been quite a recovery since the trough in 2011. Mortgage volumes were above the zero reference point in the band-pass filter by the end of 2017, similar to the point in the previous cycle reached in 1997 (seven years on from the bottom in that case; six years this time).