The Northern Ireland housing market: would unification with the south be problematic?

Abstract

Recent political events such as Brexit, as well as changing demographics have made the unification of Northern Ireland and the Republic likelier than recently thought possible. Unification would require addressing many political and economic issues. One change would be the adoption of the currency of The Republic-the euro. A low level of co-movement between Northern Irish and euro housing markets could be problematic both for the housing market and economy of Northern Ireland. If home prices in Northern Ireland were falling, while those in the rest of the euro zone were rising, the ECB would likely tighten policy. This would be the opposite of what would be optimal for Northern Ireland. We thus study house price co-movement between Northern Ireland and eight eurozone housing markets. When we employ measures that are mainly linear, results indicate that co-movement between euro housing markets and Northern Ireland may be no worse, and perhaps even greater than current co-movement with the UK. However, the use of a metric which accounts for differences in cyclical amplitudes reveals a very low level of co-movement with euro countries compared to that with the UK. Indeed, Northern Ireland exhibits much greater idiosyncrasy with the rest of the euro markets than even Ireland or Spain, which had housing booms and busts followed by sharp recessions. Joining the euro would thus entail substantial risk for the Northern Irish housing market and, hence its macroeconomy.