The housing market appears to be becoming inflated once more, with August property rates showing a substantial 10.4% increase year on year, as stated by the Central Statistics Office’s recent data. This trend seems to be relatively uniform across both urban and rural regions of Ireland. Despite an initial slowdown in response to a significant rise in interest rates between the summer of 2022 and mid-year, property prices are rapidly escalating again. Intriguingly, this recent surge in price growth commenced approximately at the beginning of the year, even prior to the initial interest rate reduction by the European Central Bank, with the momentum building since then.
To grasp the extent of this price inflation, consider a typical three-bedroom house located in the Dublin suburbs, priced at €500,000. Similar properties in Cork, Galway, or Limerick may be marginally cheaper, but the overall price trend remains consistent. For such a price, one could likely purchase a house in the outer suburbs, a property in need of refurbishment closer to the city centre, or potentially a two-bedroom duplex.
What we see is that housing of this sort is inviting offers from both, those keen on relocating as well as from first-time homeowners. Mover buyers may, for instance, be currently residing in a flat. Meanwhile, first-time property buyers could be balancing the advantages of a convenient commute from the city centre and purchasing a new residence in Meath or Kildare. These areas facilitate eligibility for the Help-to-Buy scheme and offer a more economical mortgage on a newly established A-rated property. Such properties are quickly bought up, often selling for higher than their initial listing price, leading to one successful buyer and a host of disappointed underbidders.
The market is witnessing a surge in prices, undeniably. Not only are new homes being quickly purchased, but various government sectors are also investing in housing for social and affordable purposes. The affluent segment of the market retains its robustness. Although a handful of instances suggest sluggish sales in a skewed market, estate agents ascertain consistent flow of funds from highly compensated workers, particularly from tech and professional services industries, triggering bidding wars. Corporate financing is observable predominantly in the high-end market and more so in the rental sphere, with staggering lease prices for upscale penthouses targeted at top executives. Instances of inflated prices are not hard to find in several sections of the housing market.
This scenario can be attributed to several years of undersupply, resulting in a persistent shortage in the market. The subsequent disproportion in supply and demand leads to prices surpassing what may be deemed appropriate given the current state of the Irish economy. Early 2022 data by Economic and Social Research Institute researchers suggested a house price overvaluation of approximately 7 per cent. As the prices have since increased by roughly 16 per cent, this overvaluation is likely to have escalated, despite increases in population and employment.
A downward trend in interest rates has been noted since the summer, and a prior ESRI investigation indicated that a 2022 relaxation of Central Bank’s lending rules may have contributed to subsequent price hikes. Nonetheless, the intensity of the recent price boom is noteworthy, even when factoring in all these aspects.
The situation on the ground indicates a growing affordability issue, with a considerable number of individuals being unable to afford housing. For instance, a simple €500,000 pre-owned home would necessitate a mover purchaser to earn approximately €128,000, whereas a first-time purchaser would need to earn around €112,000, with the assumption that both have the essential deposit. To consider properties in prime locations like Dublin 6 or Dún Laoghaire, a considerably larger income, exceeding €150,000, is necessary.
However, this doesn’t suggest that a decline in prices is on the horizon. The unpredictable swings of the property market often result in overpricing during a boom and underpricing following a collapse. This pattern was clearly demonstrated in Ireland with the 2008 bubble burst and the subsequent underpricing, which was driven by a credit boom according to the ESRI.
The recent surge in housing prices in Ireland isn’t mostly a result of a Celtic Tiger-type credit boom, including zero deposit mortgages and overseas property investments. Instead, the ESRI points out that the post-Covid inflation is a product of supply shortages and the roll-out of Covid savings. Despite a slowdown in the growth of house prices due to rising interest rates, they have again skyrocketed as interest rates have fallen since the summer. The ESRI also noted that a possible contributing factor to recent price growth could be the relaxation of Central Bank lending rules in 2022. Despite accounting for these factors, the pace of the recent price increase is remarkable.
An intriguing fact worth noting is a 12% reduction in the number of transactions compared to the previous year, likely reflecting the limited supply in several areas of the market more than a difficulty in affordability. This trend deserves attention.
Predicting the trajectory of Irish property prices is inherently risky. As housing becomes increasingly unaffordable for a larger number of people, this will eventually impact the market. The possibility of an economic shock, such as potential implications a Trump presidency could have, is always looming. There is a likelihood that the supply will eventually grow, regardless of the ruling party, due to the significant amount of state resources being invested. Yet, the current situation shows that there’s no shortage of individuals capable of pushing prices up. Importantly, it is anticipated that a continuous drop in interest rates could lead to even higher prices in the near future.
The notion of the Irish government attempting to minutely control this cycle is rather pointless. Its role should be to stimulate the enduring provision of sufficient desirable homes in optimal locations. An excellent blueprint for this has been provided by the Housing Commission, highlighting that the demand for housing is fuelled by demographics, property size, as well as the necessity to supersede outmoded homes. The Commission further noted the large group of individuals yearning to purchase properties, due to a paucity in supply over the recent years, an estimate of 235,000, to be exact. This suggested, in their perspective, a requirement for swift action and a significant alteration in policy.
Pending the uncertainty of a housing supply surge, the perennial cycle of prosperity and loss in the housing market persists as a threat. Naturally, a gradual recalibration would be ideal, with eased house price inflation and slowly improving wages. However, based on past examples, the Irish property market, once it significantly overextends, hardly ever experiences a ‘soft landing’.