Modeling Housing Market Fundamentals: Empirical Evidence of Extreme Market Conditions

Abstract

This article examines the issues encountered in the modeling of market fundamentals during a period of extreme price behavior. The study analyzes the price behavior of the residential property market in Ireland using a number of alternative methodological approaches in the estimation of fundamental market value. Limitations in conventional models such as an inverted demand model are highlighted, in particular, with regard to diagnostic concerns and the static nature of the model. The use of an error correction framework provides more consistent and robust findings. The analysis does appear to indicate that a substantial premium over fundamental values developed in the Irish market during the late 1990s, reaching a peak in 1999 and 2000. However, in recent years, prices have largely been in line with fundamentals.