A housing bubble?
Sir, – I read with interest your report on the ESRI’s Quarterly Economic Commentary – Summer 2017 dismissing the idea of a housing market price bubble (“ESRI says rapid rise in house prices does not signal new bubble”, June 22nd).
While it is certainly clear from the commentary that there is no evidence of a “debt-fuelled” bubble, it is not clear from the ESRI’s report that a housing bubble does not exist.
The technical definition of an asset bubble is when the intrinsic value of an asset (as measured by the present values of the asset’s future free cash flows) is less than the asset’s market value. To establish the existence of a housing asset bubble requires an estimation of the rental incomes (including imputed rent) and all risk factors likely to impact on these rental incomes.
The ESRI is correct in stating that “existing evidence suggests that the credit risk of new lending is low and as such does not pose a threat to banking sector stability”. However, in the absence of technical data on intrinsic valuations, this does not mean a housing bubble does not exist. – Yours, etc,
Lecturer in Economics
Faculty of Engineering
and the Built Environment,