The residential property market is looking frothy again. Prices in August were running 10.4 per cent up on last year, according to the latest Central Statistics Office data, with a broadly consistent picture across urban and rural Ireland. Having weathered the sharp increase in interest rates from summer 2022 to the middle of last year with a mere slowdown, prices are now rising rapidly again. Remarkably, the latest pickup in price growth started around the turn of the year, months before the first European Central Bank interest rate cut and has gathered pace ever since.
If we were to pick a house at the centre of the current price surge, we could take the example of a €500,000 three-bed in Dublin’s suburbs. The same house would have a slightly lower price point but the same dynamics in Cork, Galway or Limerick. For this kind of money we are generally talking about a house in the outer suburbs, or a “doer-upper” a bit closer to the city centre. Or a two-bed duplex perhaps.
The point is that this kind of house is attracting bids both from those seeking to move and from first-time buyers. The mover purchasers might – for example – now be in an apartment. The first-time buyers could be weighing up the benefits of living within a relatively easy commute of the city centre, versus buying a new home in Meath or Kildare where they would qualify for the Help-to-Buy scheme and a cheaper mortgage on a new A-rated property. These properties are selling quickly and generally going well above the price they are originally listed for. We end up with one buyer and a lot of frustrated underbidders.
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Prices are rising across the market, of course. New homes are snapped up too – and the various arms of the State are in the market here too, buying homes for social and affordable housing. The higher end of the market also remains strong. In a dysfunctional market, there are some anecdotes about properties which have been slow to sell. But generally, estate agents say, there remains plenty of money in the market from higher-paid employees in sectors such as tech and the well-rewarded world of professional services, to lead to bidding wars here. Corporate money is also evident at the upper end of the market, though more in the rental market, with some dizzying prices reported for leases on posh penthouses for senior executives. But you don’t have to look too far to see evidence of “froth” in many areas of the “for sale” market too.
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The €500,000 suburban three-bed is now the house at the centre of the property price surge
Behind all this, of course, lies years of underbuilding which has left the market chronically short of supply. And the resulting imbalance between demand and supply is leading to prices overshooting what might be judged to be levels justified by the current condition of the Irish economy. Based on figures in early 2022, researchers in the Economic and Social Research Institute estimated that house prices were overvalued by about 7 per cent. With prices up by around 16 per cent in the meantime, this overvaluation figure has surely risen, even though the size of the population and the numbers at work have risen in the meantime too.
Interest rates have been falling since summer and a later ESRI study said an easing of Central Bank lending rules in 2022 may also have fed in to price rises since then. Even taking all this into account, the strength of the latest price surge is striking
The reflection on the ground is many people being priced out. To buy our modest €500,000 second-hand house, for example, requires an income of about €128,000 for a mover purchaser, or €112,000 for a first-time buyer, assuming both already have the deposit. To get a sniff of Dublin 6 or Dún Laoghaire, you would need to be earning well in excess of €150,000.
That does not mean that prices are set to fall. The essence of the boom-to-bust cycle is that the market overshoots in both directions. Driven by a credit boom, the ESRI research shows, not surprisingly, that Irish prices were way overvalued when the bubble burst in 2008 and then – after the crash – well undervalued for some years.
The more recent rises in house prices have not been primarily driven by a Celtic Tiger-style credit boom, with its zero deposit mortgages and second homes in Bulgaria. The ESRI attributed the immediate post-Covid rise in prices to supply shortages and the deployment of Covid savings. House price growth slowed as interest rates shot up, but now they have taken off again. Interest rates have been falling since summer and a later ESRI study said an easing of Central Bank lending rules in 2022 may also have fed in to price rises since then. Even taking all this into account, the strength of the latest price surge is striking.
An interesting aside is that the number of transactions so far this year is down 12 per cent on last year, probably reflecting the low level of supply in many parts of the market rather than an affordability squeeze. It is a trend worth watching.
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Forecasting Irish property prices is a mug’s game. As more and more houses move out of the reach of more and more people, at some stage affordability will have an impact. And there is always the risk of an economic shock – who knows, for example, what a Trump presidency might bring? In time, supply will probably increase whoever is in government, given the vast amount of State resources now being deployed. But for now there remain enough people who can afford to bid up prices. And – crucially – the outlook is for a sustained fall in interest rates pushing prices yet higher in the short term.
There isn’t a lot of point in any Irish government trying to micromanage this cycle. The job is to encourage long-term supply of enough of the right houses in the right places. The Commission on Housing put a good framework on this, pointing out that housing need was driven by population, housing size and the need to replace older houses. And observing that the huge backlog of people wanting to buy because of undersupply in recent years – its central estimate of this was 235,000. This all meant, is its view, that an emergency response and a big policy reset was needed.
As we wait to see if supply can be boosted, the old boom-to-bust cycle remains a risk. We can hope for a gentle readjustment, of course, as house price growth eases and wages gradually catch up. But history teaches us that the Irish housing market – once it gets way out of line – rarely does a “soft landing”.