It will be at least another two years before Irish house prices start to fall – and it could be the second half of this decade before the gap between property prices and people’s incomes starts to narrow , a top economic expert has warned.
“You'll hopefully see some reduction in prices when the government's actions to increase supply take effect – but the fall in prices is unlikely to be dramatic and won't happen for the next two years,” said John Fitzgerald, an adjunct professor with Trinity College Dublin (TCD) and research affiliate with the Economic and Social Research Institute (ESRI). “I'd like to see Irish house prices closer to incomes – but I don't think that will happen until the second half of this decade.”
The Government's plans to tackle the housing crisis are set to be outlined in its 'Housing for All' strategy later this month or in early September. “There is a lot riding on the ‘Housing for All’ blueprint but regardless of what is contained within this policy document, the reality is that it will take several years to ramp up delivery [of housing] to such a degree that pricing and rental costs in the Irish housing market begin to dissipate,” said Marie Hunt, executive director at the property consultants CBRE. “Ireland’s population has continued to increase and the age profile of the population is young relative to the rest of Europe. This is leading to unprecedented demand for housing in all of its guises.”
The extent to which Irish house prices exceed incomes is now higher than it has been at any time in the last decade, according to Alan Gray, managing partner with the economic consultants, Indecon.
“The problem of affordability is evident from the ratio of house prices-to-incomes (the extent to which house prices exceed incomes),” said Gray. “These ratios are now higher than at any time over the past number of years.”
In 2018 and 2019, Irish house prices were on average about seven-and-a-half times a single person's income and almost four times a couple's income, according to an analysis by Indecon of the latest CSO figures on price-to-income ratios. The extent that Irish house prices exceeded incomes in 2018 and 2019 was therefore higher than at any time between 2010 and 2017, according to Indecon's analysis.
The soaring house prices witnessed in this country over the last year means that the disparity between people's incomes and house prices is likely to be even higher today than in 2019. In the last year alone, the average house price rose by €33,000 – or 13pc, according to the latest report from daft.ie.
However, “while property prices have risen significantly in recent years, they are still very much below the levels in 2007,” added Gray. Furthermore, Irish property prices relative to incomes are not out of line with peer countries around the world, according to Dan O'Brien, chief economist at the Institute of International and European Affairs.
All the same though, house prices in Dublin, Cork and Galway were rated as “seriously unaffordable” in the latest international housing affordability survey from the public policy firm, Demographia.
“As a result [of higher housing costs], adult children can no longer depend on having higher incomes than their parents, at least in the United States, the United Kingdom, Canada, Australia, New Zealand, Ireland and elsewhere,” said the survey. “These higher housing costs are a threat to the middle-income lifestyle because they reduce discretionary income and thus, the standard of living. Ireland had a price-to-income multiple of less than three in the early 1990s and [house prices there] remained affordable to the late 1990s.”
Some believe that an increased supply of properties will dent house price growth – as long as that supply is in line with demand. “If supply remains constrained compared to demand, some price increases can be expected,” said Gray.
There are some encouraging signs that supply is improving. Housebuilding is now back to pre-Covid levels with more than 5,000 homes built between April and June 2021 – about 55pc more than built in the same months last year, according to official figures released in late July. This rebound in house building “should help contain future house price inflation,” according to O'Brien.
An increase in supply won't necessarily drive house prices down however, according to Lorcan Sirr, senior lecturer in housing, planning and development at Technological University Dublin. Instead it could be interest rates that prove to be the gamechanger here.
“A significant driver of house prices is interest rates – rather than supply,” said Sirr. “House prices won't come down because of a sudden supply of housing. If we increased housing output from 20,000 units to 30,000 units, it would have no impact on prices if the bulk of this increase is to build to rent – or is being bought by real estate investment funds.
"I think the number of new homes coming onto the market for sale for the ordinary punter has levelled off to about 7,000 or 8,000 a year – and this will continue for some time. However if interest rates went up, that could moderate house prices because it would restrict the amount of money people can borrow through mortgages – and it would also restrict the amount of money that can be borrowed [by developers and builders] to build.”
Interest rates have been at record lows for more than a decade and there are few signs they will rise any time soon, although if and when they do, that could be a catalyst for lower house prices.
The European Central Bank (ECB) decides on the direction of interest rates in Europe and in Ireland. “House prices are significantly underpinned currently by ultra low interest rates,” said Tony Gilhawley, one of Ireland's most prominent actuaries and a well-known pension expert. “If the ECB starts at some stage to unwind ultra low rates, mortgage interest rates will rise and house prices will come under pressure. We can’t stay at negative or zero interest rates for ever.”
With Irish property prices almost at Celtic Tiger highs, many people are unable to buy homes and a big chunk of millennials believe they will never own their own home. The recent rapid escalation in prices – and the number of people scrambling to get onto, and that are priced out of, the property ladder – is reminiscent of the tail end of the Celtic Tiger, just ahead of the 2008 property price crash. Some are concerned that another house price crash could be around the corner.
A house price collapse could occur if another credit boom was allowed – and this in turn triggered an unsustainable growth in demand for housing and high levels of speculative investment, according to Gray. “This is unlikely to happen in the next year or two,” said Gray. “There are significant differences in today's housing market compared to the market before the 2008 property price crash. The previous market was characterised by very high levels of supply – fuelled by inappropriate property-based tax incentives and a credit boom. This is very different from the existing market where credit is appropriately very constrained but where supply is also very restricted.”
Trinity’s Fitzgerald believes that Irish house prices are unlikely to collapse in the next few years. However, a big unknown is if, and when, another economic shock could hit the country. A more permanent economic shock than Covid could send house prices tumbling. “Covid was a temporary shock [to the economy],” said Fitzgerald. “You cannot predict if something worse than Covid could shock the economy.”
It must also be said that Ireland – and the rest of the world – is in the very early stages of emerging from the pandemic. There therefore could still be setbacks around the corner with Covid – and the impact of the pandemic on our economy could be felt for many years yet.
Predicting the timing of the next correction or collapse in any housing market is difficult – but they do come.
“Because of the different timeframes within which changes in property demand and output occur, development cycles and booms and slumps result,” said Brendan Williams, associate professor in University College Dublin who co-wrote a major report on Irish ghost estates in 2010. “Volatile housing markets are subject to corrections.”
Reassurances that house prices won't fall because of fundamentals (such as the demand for somewhere to live) – or because the circumstances at play in the property market are different to those prior to previous house crashes – should be treated with caution, advised Gilhawley.
“It’s easy to say ‘this time it’s different' – but it is always a danger sign when someone advances that argument,” said Gilhawley. "Property – even in Ireland – is not immune from the laws of financial gravity. Markets go in cycles. What goes up must eventually come down.”