Wednesday, 3 November 2010

Comparing house price bubbles in Ireland, Northern Ireland and England

There is a certain amount of disagreement over whether we have really had a proper house price 'bubble' in England, given that you would have expected a good deal of house price inflation just from the fairly large income gains in the decade 1998 to 2008 and the fairly constrained supply in many high demand areas in the South.

But there's no disagreement at all that we saw a very large bubble in Northern Ireland, which has burst fairly spectacularly in the last couple of years. Below is a chart of simple average house prices in England and Northern Ireland between 1990 and 2009 (unadjusted for inflation). While average house prices in Northern Ireland were half those in England in 1990, they rocketed in 2006 and by 2007 they were more or less equal, only to crash in 2008 and 2009.

Similarly, the Republic of Ireland is considered to have had a bubble which also burst with a vengeance. So I wondered whether the path of Northern Irish house prices was more similar to the Republic, with which it shares a border, or to England, with which it shares a regulatory framework and macroeconomic policy.

I got Irish house price data from the Department of Environment and Northern Irish and English house prices from CLG's table 505. I used annual data from 1990 onwards, and converted from nominal to real prices using the Irish and UK CPIs (there's a separate and interesting question about whether general inflation in Northern Ireland tracks inflation in the Republic more closely than inflation in Britain, but I'm not qualified to answer that one), and I rebased each trend to 100 to allow for easier comparison. The results are below:

I don't know if this actually tells us much! The Republic's house price boom seems to have started earliest, and Northern Ireland's continued on even after the bust down south. If anything I think it reinforces the idea of the dizzying rise in prices in Northern Ireland as a pure bubble, mostly unaffected by outside forces.

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