Irish house prices are overvalued by up to 10 per cent, the Economic and Social Research Institute (ESRI) has warned, adding that an increasing number of households are carrying “elevated” levels of mortgage debt.
In its latest quarterly bulletin the think tank said the acceleration in house prices this year had led to concerns about the sustainability of such increases and whether it would lead to “a painful correction” similar to the one that followed the 2008 financial crisis.
In its analysis the ESRI modelled where house prices should be on the basis of various economic and demographic factors such as income, population, credit and interest rates. It found that prices here were overvalued by somewhere in the region of 8 per cent to 10 per cent.
“That’s not as high as it was during the time of the global financial crisis but it does mean that it merits attention,” the ESRI’s Kieran McQuinn said. “The larger the degree of overvaluation the greater the risk of significant correction.
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“Broadly speaking the market isn’t anywhere near the stressed levels seen in 2008, but there are one of two developments worth keeping an eye on,” he said.
He noted that average loan to income ratios had risen sharply in recent years, having been stable for over a decade. “What that means is that these households are potentially more susceptible to financial or employment shocks,” Mr McQuinn said.
On a wider level it also raises question marks around the capability of certain cohorts of the population to own homes, the ESRI said in its report.
The continuous increase in Irish house prices since mid-2013 means that prices are now 13 per cent higher than the pre-crash peak in April 2007.
The annual rate of house price growth is now running at 10 per cent, driven by a combination of factors including ongoing supply shortages, faster-than-expected population growth, real wage growth and the anticipation of further interest rate reductions. The Government’s Help to Buy and Shared Equity schemes which offer financial support to first-time buyers are also thought to be playing a role.
The ESRI noted that while credit growth is not as significant a factor as it was in the pre-Celtic Tiger era, there is evidence that some of the recent price growth stems from changes to the Central Bank’s mortgage lending rules. The Central Bank lifted the upper limit on the loan-to-income ratio requirement for first-time buyers in 2022 from 3.5 times income to 4, a move that the ESRI at the time described as “premature” and likely to fuel price inflation.
“Consequently, the Central Bank of Ireland must be particularly vigilant and prudent in any review of the mortgage measures in its macroprudential policy framework,” the institute said.
Because of a marked slowdown in construction in the first two quarters of this year the ESRI said new home completions would be roughly the same as last year at in or around 33,000. This figure lags underlying demand in the market, which is put at over 50,000. “Consequently in a supply-constrained environment property prices have continued to rise in 2024,” it said.
However, it noted that there have been more than 49,000 housing commencements to date this year, and if these follow a typical investment pattern the number of completions should be close to or above 40,000 for 2025.
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