Strong and Rising House Price Inflation

Austin Hughes, Chief Economist, IIB Bank

14th Mar 2006

Austin Hughes is our guest blogger, analysing the Quarter 4 2005 figures.

The Daft.ie survey provides a very clear picture and some particularly helpful detail on what is a very healthy housing market in Ireland at present. It suggests activity levels in both the purchase and rental sectors remain buoyant as demand and supply continue to grow at far stronger rates than most commentators had expected.

This report introduces the Daft House Price Index. It seems that house purchase demand has strengthened further of late which has prompted an acceleration in Irish house price inflation. The Daft House Price Index suggests that property price inflation is now running at a rate in the mid-teens. This is somewhat faster than many other house price indicators but it is consistent with anecdotal evidence emerging from the market itself of late pointing to notable pick up in demand of late. It is important to note that, the Daft.ie index is an indicator of offered prices rather than sales prices. As market sentiment has improved of late, it is to be expected that prospective sellers would scale up their expectations of what price they could achieve.

The regional breakdown of house price trends suggests that even in a generally buoyant market, variations in local demand and supply growth remain important. Limited supply and the persistence of strong demand mean Dublin house price growth continues to outpace the rest of the country. Galway reflects the same influences, albeit to a slightly less intense degree. A somewhat slower pace of price increases elsewhere reflects the particular strength of new supply in many areas.

The looming maturity of SSIA's represents a major support for the house purchase market. However the impact on the rental sector is more ambiguous. In general, the flow of SSIA's through the economy will generate more employment and as a result, more demand for rented accommodation. However, to the extent that maturing SSIA's are used to fund property investment, the supply of rented accommodation is likely to increase. This would be expected to restrain the pace of increase in rents. Arguably this influence is already in evidence both in the Daft Rent Index and in the rise in time to let and vacancy rates also seen in this report. However the recent trend in these measures also owes much to normal seasonal patterns.

If the pace of increase in rents is more modest than in house prices, it is still the case that the rented market is growing at a healthy pace. The tentative signs of recovery in rents that were highlighted in the Daft Rent Index a year ago continued throughout 2005. It is understandable that record levels of house building are now dampening the pace of rent increase. However the fact that rents are continuing to rise suggests how strong demand is. As a result a broad balance has been established in the rented sector.

With purchase demand buoyant and the supply of rental properties also increasing sharply it is not surprising that rental yields remain under pressure. Significant variations in rental yield typified by the gap between a 5.6 per cent yield on a 3-bedroom property in Dublin city centre against a 3.2 per cent yield on a 3-bedroom property in south Dublin may reflect the substantial differences in the mix between owner occupier and investor demand in these areas. They also reflect a much greater reluctance to ?pay up? for locational differences when renting than when purchasing property.

Signs of strong and rising house price inflation in the face of another record year for house building underscores just how strong the demand for property is in Ireland. In general terms, this reflects the health of the economy but there are a couple of important factors at work that have ensured the housing market remains notably stronger than most than most other economic sectors.

Ireland's population profile remains particularly supportive. Numbers in the key 25-34 age grouping are increasing at almost 5 per cent per year. This is in stark contrast to other Euro area countries where numbers in the key household formation age groups are growing by around a quarter of a percent. The recent surge in immigration suggests this divergence will remain a uniquely favourable support for the Irish housing market in coming years. The exceptional trend in demand should also be seen in the context of a still relatively low housing stock in Ireland. The number of dwellings per 1,000 inhabitants at 404 is now 30 below the European average.

Discuss This Article

  • Re: The Daft Report Q4 2005

    Posted By: Philip Date: Wednesday March 15, 2006 @11:38PM

    Hi

    The 4th Quarter Report is excellent

    Austin Hughes talks sense

    Yours

    Philip Smith
    086 832 3089

    • Reply to this message
  • Re: The Daft Report Q4 2005

    Posted By: Debt Wish Date: Monday March 20, 2006 @04:17PM

    So house prices continue to rise while rental yields fall. Yields are too low to be sustained. History tell us that eventually it must snap back to the norm, so either rents have to rise substantially or house prices must fall.

    Which is it to be?

    Debt Wish

    • Reply to this message
  • Re: The Daft Report Q4 2005

    Posted By: Frank Quinn Date: Wednesday March 22, 2006 @05:05PM

    I found the report very interesting and informative.

    Thanks and keep up the good work!

    Regards,
    Frank

    • Reply to this message
  • Re: The Daft Report Q4 2005

    Posted By: Arthur Doohan Date: Thursday March 23, 2006 @12:35PM

    An interesting report with some v dodgy calculations (in the sections I bothered analyse closely)!

    The investor analysis affordability section shows a cost figure WITHOUT any repayment and over 35 yrs. This is highly unrealistic.

    The monthly income section makes no allowance for loss of income due to vacancy. Using the figures made available in the report I recalculated the income and found an average loss of 33%(st dev +- 12%) of monthly costs! Losses were found in ALL sectors except Dublin Centre 3 bed Properties showing a miserly 3% profit.

    Come on, guys! Next time be a bit more realistic in your calculations.

    The revised spreadsheet is available from me at arthur at doohan dot org. Please mention "Property Sheet" in the email subject field if you want a copy.

    Regards

    AD

    • Reply to this message
  • Re: The Daft Report Q4 2005 - and the queried figures with revised spreadsheet

    Posted By: DOK Date: Wednesday April 5, 2006 @06:19PM

    Hi

    Can you advise the email address you refer to again please to look for your revised spreadsheet of the information included in the original report?

    Many thanks

    • Reply to this message
  • Re: The Daft Report Q4 2005 - and the queried figures with revised spreadsheet

    Posted By: mary mc inerney Date: Saturday May 6, 2006 @10:50PM

    daveythe@hotmail.com

    revised spreadsheet

    • Reply to this message
  • Re: The Daft Report Q4 2005

    Posted By: Mary mc inerney Date: Saturday May 6, 2006 @10:42PM

    property sheet

    any chance you could send me a copy of your calculations?
    thanks in advance

    to
    daveythe@hotmail.com

    • Reply to this message
  • Re: The Daft Report Q4 2005

    Posted By: ramune Date: Sunday May 14, 2006 @08:11AM

    Išnuomoju dvivieti kambari Asburne

    • Reply to this message
  • Re: The Daft Report Q4 2005

    Posted By: tirna nowge Date: Tuesday March 4, 2008 @12:17AM

    what ever you say big man......how wrong could you be !! I must remember to get a copy of this and remind you of it when you come out with the next prediction....i should print and frame these and hang them in the pub beside all the other oirish fairy tales ... believable if you are gullible....they say if you profess something for long enough you will eventually be proved right.......the same applies to being found out !!

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