Property Bubble, Ireland

1. Introduction
  2. Property bubble
2.1 Property bubble in general understanding.

2.1.1 Main determinants of Real Estate Prices
Real estate markets are characterized by heterogeneity, consisting of a series of geographical and sectoral submarkets that lack a central trading market. No two properties are identical and information on market transactions is often limited and not generally available. Also, real estate markets are typically characterized by infrequent trades, a negotiated pricing process, large transaction costs and rigid supply. In contract to stock markets and other financial markets there is, therefore, no clear market price. Differences in financing structure, regulatory frameworks, tax treatment, and the use of real estate as collateral complicate international comparisons.
The price of en existing property should in principal equal the discounted present value of the expected stream of future income (rents), which depends on expected growth in income, anticipated real interest rates, taxes and other structural factors. In a well-functioning market, the price should equilibrate demand and supply. In other words, the fundamental equilibrium price can be thought of as the price at which the stock of existing real estate equals the replacement cost. If the replacement cost is above the price of real estate, no new constructions will take place, and if it is lower, new construction will equilibrate the market. Real estate cycles for well-functioning markets will then be driven by economic cycles, and depend on changes in, for instance expected growth in income, real interest rates, taxes, and future demographic profiles.
However, as mentioned above, the real estate market is characterized by several market imperfections that distort the adjustment toward equilibrium. First, the market suffers from imperfect information about future demand. Second, supply is rigid in the sense that new construction may take several years to be completed,... [continues]

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