An Econometric Analysis of the Irish Private Housing Industry Using the Johansen Time Series Cointegration Method

This paper focuses on the application of modern econometric techniques to a model of the demand for private housing in Ireland. The paper will firstly outline the theoretical econometric framework in order to explain the concept of cointegration within an economic model framework. The Johansen method for analyzing economic models is demonstrated and it is shown how the method can be applied to economic data. An economic demand model, by definition, defines the delineation of variables which affect the dynamics of the demand function. The paper attempts to apply the Johansen method to different models of the demand for housing in Ireland. The basic economic structure of a demand function for private housing in Ireland suggests that the model should contain data representing Demand, Income, House Prices, Mortgage Interest Rates and a demographic variable. This demographic variable measures the rate of household formation and represents the propensity for a household to form. Following a comprehensive literature review, two competing definitions of household formation are apparent. The structure of these competing definitions is explained in the paper and a brief economic outline is given in each case. The Johansen procedure is used to decide upon which proxy variable to consider in the model.