A number of Ireland’s top economists have warned that house prices will continue to rise in the coming years, particularly in Dublin. Speaking to the Sunday Independent this weekend, Stephen Kinsella, associate professor of economics at the University of Limerick’s Kemmy Business School, said there is no sign of the capital’s house price frenzy abating before 2023 or 2024.
House prices will continue to rise in the capital over the next two to three years. The growth rate of prices might fall but prices are still going to go up,” Kinsella said.
His prediction assumes no major government policy change to housing, describing that as highly unlikely.
“The objective of almost all government policy is to keep house prices high so I would be very interested in a simple question put to every TD: would you like house prices to go up, stay steady or fall in your area?”
When asked if a Sinn Féin government would reduce prices, he said: “Not based on the policies I’ve seen.” He suggested that Sinn Féin policies such as abolishing property tax and reducing carbon taxes would further increase prices by making house-building more expensive.
Asked if would-be home-owners should buy now, despite prices rising by another 9pc in the past year, he said: “Yes, it is a good time if you can afford it. And if the person has built up a strong deposit and wants to live in the property for 10 years or more.”
Kinsella cautions against investors buying to “flip” the property. He said there will be significant policy changes that will negatively affect those who treat residential property as a financial asset. Over time, other market forces could lead to a big drop in prices, he warned.
“All it would take for house prices to collapse here is for institutional investors to find better rates of return elsewhere. And that has happened many, many times in the past 800 years. It’s what happened in 2007. You asked me a question: what could cause house prices to fall? It’s very simply that.”
Brian Lucey
House prices will not get any cheaper in the medium term. So if price is your ‘pinch point’, then you definitely should buy now — if you need it and can afford to. They might get cheaper in the long run but not in the short to medium term — and that is where most of us live. If house prices fell tomorrow by 10pc then you would have every semi-professional landlord in the world buying them up.
I also don’t think government policy will fix the situation. For 50 years successive governments have talked about fixing the housing market, and for 50 years they’ve failed. So a radical change won’t happen in the next five years.
House prices are rising down the country thanks to remote working, but I don’t see remote working persisting long term. Three weeks ago Dublin city centre was pretty empty; now it’s noticeably busier, with people returning to offices. In normal circumstances you would ask yourself: where is your job and where do you want to live?
I don’t think the Evergrande situation in China is a red flag. Does anyone really think the Chinese government is going to allow their economy to implode? I don’t. They will do whatever they have to do to keep it going. People are calling this ‘Asia’s Lehman’s moment’, but that came in the context of an already wobbly financial system. We don’t have those strains now globally.
Yes, in Ireland house prices are way over what they are in any other comparable European countries but they are only going to come down with increased supply. People ask: ‘What if there’s a global crash?’ But we just had one. If we get something worse than a once-in-a generation plague we’ll have a whole pile of things to worry about, not just the housing market.
The only way prices will dramatically fall is if we woke up tomorrow morning and suddenly found 500,000 houses had appeared on the outskirts of our major towns and cities. And that’s not going to happen.
Brian Lucey is a professor at TCD
Colm McCarthy
Back in 2004 or 2005 I told a few people: “Don’t buy a house. They are too expensive.” Of course, I was wrong. They went up for another two or three years. It’s very difficult to predict when a bubble will burst. You can recognise it but it can still bubble along for two or three years. And right now it’s beginning to look like it is a bubble. The speed of increases in certain parts of the country at a time when a lot of people are struggling is worrying.
The pandemic has hurt the economy. A lot of firms are in trouble. There shouldn’t really be a rapid growth in prices, but there is and that makes me think that at least some of it is being driven by people who think, ‘God, I better buy now! The prices are nuts but they might be even nuttier next year!’ And that is classic bubble-thinking.
Prices are at dangerous levels and there is a non-trivial risk that if people overextend then they will get caught. There is also a risk the Government might actually start doing housing policy correctly. In which case prices will fall. Remember, house prices are now double the cost of construction. And we are not Manhattan island — there is no shortage of land here; there’s just a shortage of zoning and planning permissions.
If you believe that land is plentiful — and it is — then the price of houses should not be much more than the cost of construction. So if the Government starts doing things properly then prices will fall. Governments need a source of income from somewhere but a more sensible thing to do, for example, would be to forget about VAT and have more serious property taxes. In Ireland these are very, very low by European standards.
Overall though I would tell people: If you can afford to, then wait.
Colm McCarthy is a ‘Sunday Independent’ columnist and former UCD economics lecturer
Alan McQuaid
Houses are overvalued and the market is going to collapse again at some point. I have no doubt about that. We haven’t learned our lesson from the Celtic Tiger crash. I don’t want to be too ‘doom and gloom’ about it, but I wouldn’t be surprised if we go from financial crisis to a global pandemic and then back into a financial crisis again.
When interest rates are so low you are just encouraging everyone to get involved. Look at what happened before the Lehman Brothers collapse. They were encouraging people to get involved who weren’t in a position to pay back the money — and things turned nasty.
I think in three years’ time the world will look very different. That’s just my own gut feeling. There are so many factors — rates are so low the central banks have dug themselves into a hole, and its going to be very hard to get out of it. We will have another Lehman’s moment. Someone is going to go bust. The Evergrande situation [in China] is also very, very precarious.
We are moving into a different world now. Angela Merkel is gone and she was the voice of reason in Europe. You could wait to buy a house, but you have to also remember if there’s going to be a crash then the issue with supply is going to become more dramatic. So, in saying all that, I would still buy now if you can afford it because you might not get this chance again.
I don’t think anyone should be stretching themselves at the risk of putting themselves in total misery. But if you go for a fixed mortgage then at least you have security, and that takes a lot of uncertainty out of the equation.
Alan McQuaid is chief economist at Bloxham Stockbrokers
Conall Mac Coille
Whether you should buy or not depends on whether you can afford it without overstretching. Some of the pick-up in house price inflation has been temporary because of the pandemic. People may be surprised at how fast housing supply will pick up in the next two years.
Construction commenced on 29,000 homes in the 12 months to July, and it’s also possible we will see housing completions rise above 30,000 in 2022. So the housing market may become a little easier.
What really counts when asking if house prices are overvalued is how they are moving relative to people’s incomes. If house prices grow by 4pc and wages grow by 4pc, then affordability is stable. Wage growth was running around 3-4pc prior to the pandemic. Next year we expect house price inflation will fall back from the high levels we are seeing at the moment. Our current forecast for next year is that house prices will rise by a further 3.5pc, but that will be more in line with wage growth.
What you would hope happens is that, as supply picks up, wages will grow faster than house prices and affordability will gradually improve.
Overall, though, it’s a very difficult market and it’s going to take a number of years to get easier. In other countries, such as the US, we are seeing double-digit house-price inflation but that isn’t sustainable in the medium term.
For the UK there is some survey evidence that home-buyers felt they may have overpaid during the pandemic because there was a rush for space and an element of panic set in.
Will people in Ireland feel they overpaid? We will see in 2022. Right now the biggest threat is an unexpected global slowdown, higher interest rates and inflation.
Conall Mac Coille is chief economist at Davy
Rachel Slaymaker
It’s a very challenging time to buy so it’s more a question of feasibility. Given the supply constraints, the pent-up demand and the significant demographic pressures, I don’t think prices are likely to ease or fall any time soon. So I think — for those who are able to buy — it may be an acceptable time to do so. It’s also very difficult to predict when a crash will happen.
With prices rising so rapidly, we automatically think back to 2007. But this situation is very, very different now. In the Celtic Tiger it was a credit-fuelled house bubble. Since 2015 we have had very strict lending practices. So I think it’s unlikely we will see a crash in Irish house prices in the coming years.
If you’re asking me if a person should wait a few years before getting into the market I would say prices are rising rapidly, the economy is recovering strongly and savings have massively increased so we may well see a moderation in house price inflation— but that’s quite different to a crash. I don’t expect a crash any time soon.
Supply takes a long time to come on stream, so in my view it would make sense to buy now if you can afford it and are not stretching yourself.
Rachel Slaymaker is a research officer with the ESRI
Karl Deeter
A lot of the people who are bearish have predicted 18 of the last two financial crashes. And it’s important to say that sometimes we get predictions wrong. When coronavirus came, I said: “That’s going to mess up house prices” — and look what happened.
I tell people: “I’m often wrong but seldom in doubt.” At the same time, what I tell you I really believe. And right now I think the market is precarious. There are probably two or three years left of high house prices and then supply will come on stream. I also think we are approaching a time of potential deep risk.
In 2017, I wrote that we will see a big correction between 2023 and 2026. Will it be the same as the last? No. Will it be a banking crisis? No, because banks aren’t over-leveraged. This time the ones who will get hit hard are the institutional investors and regular people.
Regular people always get mowed down in the process. If you need to buy a house then just make sure you are making the best future-proofed decision for yourself.
Look at someone who bought a home in 2006. Say they took out a tracker mortgage and they were in negative equity. If they’ve stayed in that house and paid the mortgage, they’re now in equity — so you can’t really argue that they’ve come out of the crash badly.
It’s really about future-proofing your financial resilience through fixed interest rates and insurance that covers you if you can’t work.
Understand your own financial risk and build financial resilience. That’s an entirely different approach to, ‘Will I buy or not?’ The only thing you have to fall back on is your own innate preparation.
Karl Deeter is financial adviser and analyst
